China's Internet Stocks Facing Political Risks
China's Internet is the only strategic sector of the economy where private companies dominate. That oddity hasn't escaped the attention of the government. It shouldn't escape investors' attention either.
China's Internet firms have been one of the year's best investments, with Baidu -- China's main search engine -- and Sina -- owner of the popular Weibo microblog -- at the center of the action. Sina's second-quarterresults, published Thursday, showed registered users for the Twitter-like service topping 200 million, triggering a 5.5% jump in a stock that had already doubled over the last year.
But in their eagerness to buy a piece of the Chinese Internet dream, investors are overlooking the risk of government actions. Baidu had a reminder of the potential for problems this Monday when state broadcaster China Central Television aired a 30-minute special exposing negligence by members of the sales force in allowing fraudulent adverts on its platform. Baidu's stock fell 9% in the two days following the broadcast.
The fact that other arms of the state media haven't jumped on the bandwagon suggests this isn't a concerted campaign against Baidu. But the government's tolerance for private companies playing a dominant role in strategic sectors is limited. In the eyes of Beijing, Chinese Baidu was preferable to the foreign Google -- which exited from the mainland market in 2010. Now that Google is gone, private Baidu might find itself increasingly in the sights of the government regulators trying to maintain control of the Internet.
Sina also faces risks. The growing prominence of Weibo as a focal point for dissenting voices will inevitably attract the attention of the authorities. Information about the Wenzhou train crash, and rumblings of dissent in the days that followed, were distributed first and expressed more forcefully on Weibo than in the official press. That pushed Sina's own censors into overdrive, deleting messages that failed to tow the patriotic line in reporting the crash.
An 87% year-to-year jump in Sina's operating costs in the second quarter is attributed in part to increased personnel costs for the management of Weibo. It is tempting to conclude that this reflects the cost of self-censorship required to appease the government. Weibo might be Twitter-like in its functionality. But if the company has to hire hundreds of staff to monitor and delete inappropriate content, it won't be Twitter-like in its cost structure. Heavy-handed censorship also risks alienating Weibo's urban educated user base, who value precisely the free flow of ideas it allows.
Baidu, Sina and China's other Internet giants have their own channels of influence and have, so far, charted a course through treacherous waters with some skill. But in state-dominated China, private success brings its own problems. Increased attention from the regulators is a risk that investors shouldn't ignore.
Tom Orlik
China's Internet firms have been one of the year's best investments, with Baidu -- China's main search engine -- and Sina -- owner of the popular Weibo microblog -- at the center of the action. Sina's second-quarterresults, published Thursday, showed registered users for the Twitter-like service topping 200 million, triggering a 5.5% jump in a stock that had already doubled over the last year.
But in their eagerness to buy a piece of the Chinese Internet dream, investors are overlooking the risk of government actions. Baidu had a reminder of the potential for problems this Monday when state broadcaster China Central Television aired a 30-minute special exposing negligence by members of the sales force in allowing fraudulent adverts on its platform. Baidu's stock fell 9% in the two days following the broadcast.
The fact that other arms of the state media haven't jumped on the bandwagon suggests this isn't a concerted campaign against Baidu. But the government's tolerance for private companies playing a dominant role in strategic sectors is limited. In the eyes of Beijing, Chinese Baidu was preferable to the foreign Google -- which exited from the mainland market in 2010. Now that Google is gone, private Baidu might find itself increasingly in the sights of the government regulators trying to maintain control of the Internet.
Sina also faces risks. The growing prominence of Weibo as a focal point for dissenting voices will inevitably attract the attention of the authorities. Information about the Wenzhou train crash, and rumblings of dissent in the days that followed, were distributed first and expressed more forcefully on Weibo than in the official press. That pushed Sina's own censors into overdrive, deleting messages that failed to tow the patriotic line in reporting the crash.
An 87% year-to-year jump in Sina's operating costs in the second quarter is attributed in part to increased personnel costs for the management of Weibo. It is tempting to conclude that this reflects the cost of self-censorship required to appease the government. Weibo might be Twitter-like in its functionality. But if the company has to hire hundreds of staff to monitor and delete inappropriate content, it won't be Twitter-like in its cost structure. Heavy-handed censorship also risks alienating Weibo's urban educated user base, who value precisely the free flow of ideas it allows.
Baidu, Sina and China's other Internet giants have their own channels of influence and have, so far, charted a course through treacherous waters with some skill. But in state-dominated China, private success brings its own problems. Increased attention from the regulators is a risk that investors shouldn't ignore.
Tom Orlik
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