China's Internet Industry

China's Internet Industry

Order Code RL30636
CRS Report for Congress
Received through the CRS Web
China’s Internet Industry
August 14, 2000
(name redacted)
Analyst in Asian Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

China’s Internet Industry
Summary
The Chinese Internet industry is one of the fastest growing in the world; the number
of users is expected to grow from 9 million to nearly 20 million in 2000 alone. Chinese
scientific research institutes, the Chinese government, and Chinese high tech entrepreneurs,
many of them backed by American venture capital, have forged the development of the
Internet in China. Upon its accession to the World Trade Organization (WTO), China has
promised to open its telecommunications sector and Internet industry to much greater
foreign investment and trade.
The government of the PRC (People’s Republic of China) generally welcomes the
Internet’s usefulness in facilitating business transactions and academic research and in
attracting foreign investment. However, many Chinese officials fear the Internet’s
liberalizing effects upon China’s economy and politics. They have resisted opening up the
telecommunications sector and allowing electronic information and communication to flow
unimpeded. State companies monopolize the Internet service provider (ISP) market. The
government attempts to restrict political uses of the Internet, though it has been unable to
monitor and regulate all of the medium’s activity. Some observers suggest that the Ministry
of Information Industry will continue to hinder private sector activity and foreign investment
in the Internet industry, despite China’s accession to the WTO. This report will be
updated as warranted.

Contents
Internet Usage in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Rapid Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Computer Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Mobile Telephones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Chinese Internet Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Internet Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Controls over Internet Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
“Plugging a Sieve” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Internet’s Possible Effects on Chinese Politics . . . . . . . . . . . . . . . . . . . . . . 7
U.S. Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Congressional Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
WTO Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
U.S. Private Sector Involvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
List of Figures
Figure 1. China Internet User Profile by Age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

China’s Internet Industry
Internet Usage in China
Internet usage in China is expected to grow rapidly over the next decade, providing
greater business opportunities and access to information. The Chinese government has
attempted develop the Internet while regulating its operation and content. While it has
been unable to completely control regional Internet development plans, private business
ventures, and individual activities online, the Internet’s political effects have so far been
minimal. As China addresses its World Trade Organization agreements to open its
telecommunications sector and Internet industry to foreign investment and trade, U.S.
companies will likely find both opportunities and obstacles.
Rapid Growth
During the past four years, the number of Internet users in China has doubled
annually; industry analysts expect this growth to continue. Some experts estimate that the
number of Internet users in China will reach 15-20 million by the end of 2000, ranking fifth
in the world. By 2005, China may have the second-largest Internet population, though it
will still trail far behind the United States.1 Chinese users are predominately urban, male
(over two-thirds), university-educated, and young (see Figure 1). The regions with the
greatest Internet activity are the cities of Beijing and Shanghai and the province of
Guangdong. The largest occupational user groups are students (19.3%), computer
technicians (14.9%), engineers (9.9%), foreign enterprise employees (8.9%), Post and
Telecommunications Ministry (now Information Industry Ministry) engineers (7.4%), and
government staff (6.9%). Most Chinese get online at home (50%), at the office (37%),2
or at an Internet café (11%). The average monthly income of home Internet users is more
than twice that of those without home access. Favored activities are using e-mail, gathering
information, downloading software, and chatting online.3
The totals of domain addresses and Web sites have also been growing rapidly, at
about 20% per quarter. In 1999, there were 48,695 domain addresses and 15,153 Web
1 Stephen J. Anderson, “China’s Widening Web,” The China Business Review, March-
April 2000; “China to Have World’s Second Largest Net-population in 2005,” Muzi Daily
News, May 1, 2000 [http://www.dailynews.muzi.com]. By year-end 2000, the top five
countries in Internet users are projected as follows (in millions): U.S. (135.7), Japan (26.9),
Germany (19.1), the UK (17.9); China (15.8).
2 Foreign companies in China are an important source of Internet access.
3 China Internet Network Information Center [http://www.cnnic.net.cn].

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sites. An industry analyst predicts that by 2003, China will surpass South Korea to rank
first in Asia for the number of domain names registered annually.4
Figure 1. China Internet User Profile by Age
Computer Ownership
About 32 million Chinese own personal computers. Less than 2% of Chinese
households own a computer compared to over 50% of U.S. households. Nonetheless,
China’s demand for computers is expected to be the second highest in the world after the
United States’ by the end of 2000. Major American suppliers in China – including IBM,
Hewlett-Packard, Compaq, and Dell – have captured approximately 25% of the personal
computer market through exports and local production. Legend, a domestic personal
computer manufacturer which is owned jointly by the Chinese Academy of Sciences and
private investors, is the largest single vendor with 25% of the market.5
Mobile Telephones
Because personal computers are still beyond the financial reach of most Chinese,
mobile telephones are expected to be the primary means of Internet activity over the next
4 Stephen J. Anderson, “China’s Widening Web,” The China Business Review, March-April
2000; Paul Mooney, “Master of His Domain,” ChinaOnline, May 30, 2000.
5 Peggy Lim and Ivan Trinh, “Personal Computers and Peripherals,” United States
Department of State, 1999; Stephen Anderson and S. Cao, and Z. Huang, “Computer
Internet Service,” United States Department of State, 1999.

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decade. In 1999, China had approximately 40 million cellular phone subscribers.6 One
expert predicts that in two years, the Internet may become available to 60 million Chinese
via their cell phones. According to one estimate, by 2004, 250 million cell phones in China
will be equipped with wireless application protocol (WAP) or Internet access capability.7
China’s mobile telephone market is dominated by foreign brands. Motorola, Nokia, and
Ericsson hold 31.9%, 29.4%, and 21.4% of the market, respectively.8
The Chinese Internet Industry
China’s Internet services market – Internet service providers (ISPs) and Internet
content providers (ICPs)9 – is characterized by dynamic private entrepreneurship and
government involvement and regulation. Central and local governments have demonstrated
conflicting attitudes toward private Internet companies. They have attempted to maintain
or develop their own Internet services while both supporting and controlling the private
sector. U.S. companies have broken little ground in providing Internet services. In
September 1999, America Online (AOL) and a local partner launched Internet service in
Hong Kong with an eye toward mainland China. AOL has engaged in preliminary
discussions with PRC officials on setting up a Chinese Internet service or teaming up with
a local service provider, but it is holding off due to regulatory and market uncertainties.10
In June 2000, Sinobull.com,11 an e-finance or online securities trading company,
announced an agreement with China Telecom to provide financial services through
sinohome.com [http://www.sinohome.com], the Web portal of Chinanet, China Telecom’s
ISP.
Internet Service Providers
China’s ISP market is dominated by state-owned telecommunications companies
administered by the Ministry of Information Industry (MII). China Telecom was the
original national telephone monopoly and continues to dominate land line services. In
6 “White House Fact Sheet on the U.S.-China WTO Accession Deal,” U.S. Newswire,
March 1, 2000.
7 Jonathan S. Landreth, “‘Don’t Be Dewy-Eyed,’Author Schell Warns,” Sina.com News,
5/23/00 [http://www.Sina.com.cn]; Inside China Today [http://www.insidechina.com],
“Mobile Phones the Future of the Internet in China,” 4/17/00, Agence France Presse.
8 “Motorola, Nokia, Ericsson, Siemens Top China’s Cellphone Sector, Survey Says,”
ChinaOnline, July 31, 2000.
9 Internet service providers such as America Online sell access links to the World Wide
Web; Internet content providers offer search engines, vertical channels, news, e-mail, and
other services. In the United States, the many Internet service providers also offer content
services; in China, the two functions remain distinct.
10 “‘You’ve Got Mail’ May Be Heard in China Soon,” ChinaOnline, July 21, 2000.
11 Sinobull.com [http://www.sinobull.com.cn] is a subsidiary of The Hartcourt Companies,
Inc.

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1999, MII broke up China Telecom and created China Unicom to specialize in pager
services, China Mobile to serve the cellular phone market, and China Star to provide
satellite communications. Other major telecommunications competitors offering Internet
services include Jitong Communications, also operated by MII, and Netcom
Corporation,12 which offers high bandwidth services. Both China Telecom and China
Unicom are owned partially by private investors: China Telecom raised $4.2 billion in
1997 when it went public on the New York Stock Exchange (NYSE); China Unicom
garnered nearly $5 billion in a June 2000 NYSE initial public offering.13
In 1999, China Telecom’s ISP, Chinanet [http://www.chinanet.cn.net], and its local
subsidiaries dominated China’s ISP market, controlling 83% of Internet connections.
Nearly all of China’s privately-owned ISP’s have struggled to make profits. Eighty
percent of their costs involve leasing telephone lines from China Telecom.14 Furthermore,
because the major ISPs are administered by MII, they reportedly often enjoy preferential
treatment by the regulatory agency. Observers predict that 70% of the country’s Internet
companies will go bankrupt or merge with others by the end of 2000.15 Those with
venture-capital, government affiliations, or specialized services have better chances of
success.
In July 2000, MII began considering relaxing regulations on small, private ISP’s in
order to create a more competitive environment in anticipation of China’s membership in
the WTO. However, some industry experts expect China Telecom to remain dominant
and MII to continue to resist market liberalization in order to maintain its controls over
Chinese Web access and content.16 In July 2000, China Telecom offered special low
rates to several state media organizations, including Xinhua News Agency, People’s Daily,
and China Central Television, who operate Web sites.
Controls over Internet Content
The Chinese government attempts to control the Internet in three ways:
(1) The state constrains Internet activity through granting or withholding permits and
licenses, government contracts, and other privileges. For example, many users are
required to register with the local police when they purchase Internet service. Internet
12 Netcom is a joint stock company owned by five central government divisions and Shanghai
municipality.
13 Anderson, “China’s Widening Web.”
14 By contrast, connector fees constitute only 5-6% of American ISP costs. Wei Liming,
“Are You Online?”Beijing Review, November 30-December 6, 1998, pp. 8-10.
15 “70% of China Internet Firms Face Bankruptcy, Merger,” Muzi Daily News, May 4, 2000
[http://www.dailynews.muzi.com]; “MII Report Card: China’s ISPs Demonstrate
Weaknesses but Are Progressing,” ChinaOnline, July 13, 2000.
16 “After WTO, China Will Partially Open Telecom Sector to Foreign Investment,”
ChinaOnline, July 26, 2000.

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content providers (ICPs) must obtain approval from government agencies to connect to
ISPs, disseminate news, and list on foreign stock exchanges.
(2) The Internet is directly censored. For example, Chinese police and state
telecommunications authorities sporadically monitor and intermittently block e-mail
communication and domestic and foreign Web sites that contain views that are highly
critical of the government. Twenty provinces and municipalities have reportedly
established Internet police forces. Censors at Government-run chat rooms delete
provocative messages. Obstructed foreign Web sites have included the Washington Post
and New York Times. However, both central and local governments lack the capacity to
screen all e-mailings and close all objectionable sites all the time.
(3) The Chinese Communist Party Propaganda Department, the State Council
Information Office, the Ministry of Public Security, and other agencies set general
guidelines for Internet and other mass media content. For example, the state prohibits both
official and non-official news sites from quoting foreign news sources or reporting without
Communist Party approval. The Chinese government forbids Internet users, ISPs, and
ICPs to directly broach sensitive political topics or to access or provide links to Web sites
that contain banned content.17 The State Secrecy Bureau forbids any communication or
information involving “state secrets.”18
Reported examples of punishable Internet activity have included having a personal
Web site that is indirectly linked to a pornographic Web address, selling Chinese e-mail
addresses to a dissident group located in the United States, and posting “subversive” news
or views on such issues as the Tiananmen Square crackdown and the Falun Gong
movement. Sanctions for illegal Internet activity have included temporarily shutting down
Web sites, fines, and prison sentences of one to ten years. There are reportedly two
Chinese “cyberdissidents” currently serving jail terms.19 In February 2000, hundreds of
Internet cafés in Beijing and Shanghai were closed for operating without an official license,
not paying taxes, or disseminating provocative political or pornographic material.20 In
August 2000, Chinese police closed a dissident Web site, “New Culture Forum,” but
could not find its sponsors.
Most Chinese e-mail writers, Web site creators, and private Internet content
providers such as Sina.com engage in self-censorship in order to avoid trouble with the
government. ChinaOnline [http://www.chinaonline.com], an American Web site that
provides information on China’s business environment and high tech industry, avoids
17 Lester J. Gesteland, “Internet Censored Further in China,” ChinaOnline, January 26,
2000; Gary Chen, “China Internet: Government Tightens Controls, Clamps Down On
News,” ChinaOnline, May 18, 2000.
18 “State secrets” can mean any information that has not been officially released. “Passing
state secrets” is punishable by death, though sentences are usually commuted to prison terms
of 10-15 years.
19 Huang Qi posted information over the Internet about the Tiananmen Square crackdown;
Qi Yanchen posted articles critical of the PRC government.
20 In 1999, Beijing and Shanghai reportedly had 1000 and 900 Internet cafés, respectively.

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controversial political issues regarding human rights, Tibet, and Taiwan. Many Chinese
Internet portals utilize software to weed out politically sensitive language in their chat
rooms. Moreover, high user fees and telephone charges and slow Internet access speeds
discourage many Chinese from surfing the Web for relatively superfluous, including
political, purposes.21 In order to better deal with regulatory and content issues and break
into the saturated ICP market, Yahoo! negotiated a joint venture with Founder
Electronics,22 a Chinese software company, to produce a Chinese Web portal.
The Chinese government is also exploiting the Internet for its own purposes. Agencies
and news media of the Communist Party and state are developing their own Web sites to
compete with private ones and to disseminate propaganda. The Internet is being used to
connect regional government units. Police and security forces are developing software to
monitor Internet communication .
“Plugging a Sieve”. Many government officials acknowledge that the state lacks
sufficient resources and capabilities to monitor the entire Internet.23 Despite government
controls and self-censorship, the Internet has provided many Chinese with a rapid and
largely unmonitored means of communication through e-mail, relatively open forums of
expression via chat rooms, and unprecedented exposure to foreign news and ideas by way
of the World Wide Web. For example, both the banned China Democracy Party and
Falun Gong movement relied on e-mail and their own Web sites to cultivate members.24
Internet cafés, which sell terminal access for an hourly fee, provide anonymity for
individuals who express controversial ideas in chat rooms; the Taiwanese presidential
election and a corruption scandal in Xiamen city have been popular recent topics.25
Authors often criticize political leaders by using nicknames which escape monitoring
personnel and software.
Many foreign-language Web sites, even those with political content, evade censors.
Hong Kong Web sites are a popular source of foreign news. Chinese gays, lacking open
spaces to meet, have reportedly used the Internet to make contacts in China and abroad.
Since the majority of China’s most popular ICP’s are privately-owned, content is
driven not only by concerns about censors but also about readership. In order to attract
21 Slow access speeds are caused by low bandwidth, slow modems of Internet servers, and
insufficient telephone trunk lines that link China to the outside world.
22 Founder Group is owned by Beijing University and private investors in China and Hong
Kong.
23 Scott Savin, “China’s Internet Shakedown,” Asian Wall Street Journal, February 2, 2000,
p. 10.
24 When the government cracked down on these movements, it also closed their Web sites.
2 5 Elisabeth Rosenthal, “Web Sites Bloom in China, and Are Weeded,” New York Times,
December 23, 1999; Lorien Holland and Trish Saywell, “Plugging a Sieve,” Far Eastern
Economic Review, February 10, 2000, p. 20; John Pomfret, “Chinese Web Opens Portals
to New Way of Life,” Washington Post, February 13, 2000, p. A1.

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readers, Chinese Internet portals provide current and sometimes controversial news and
links about the economy, society, and alternative lifestyles. They occasionally push the
boundaries of acceptable political coverage. For example, Sohu.com was the first Web
site to carry the text of Taiwan President Chen Shui-bian’s inauguration speech.26
Some Chinese dissidents have reportedly found ways to avoid detection and bypass
government filters. They have spread political news by sending mass e-mailings to random
e-mail addresses while changing their own Internet addresses frequently. Underground
Internet magazines have been written in China, sent overseas, and then e-mailed back to
China.27 Some Internet users connect to special Web sites that can access banned URL’s.
Chinese Web surfers can also evade government controls by setting up accounts with
foreign Internet service providers. Hackers have disrupted official Web sites and disabled
the devices that block Internet addresses.28
The Internet’s Possible Effects on Chinese Politics
The Internet has given a small but rapidly growing number of Chinese economic
opportunities and a potent communication and information tool. Analysts suggest several
factors that may influence how Chinese use the Internet politically: the government’s efforts
to regulate content; MII’s regulatory powers over Internet services; the economic and
political influence of the new technological elite; and the political atmosphere in general.
As with economic reforms, the PRC government both welcomes its contributions to
China’s modernization and guards against its adverse effects on political control. Some of
the government’s efforts at regulating the Internet are new and only partially successful;
they involve employing personnel, software, and servers that monitor Internet traffic. Other
means of controlling the Internet have long been used to effectively regulate other forms
of social activity. These methods include granting compliant individuals and companies
government approval or material rewards and severely punishing those who violate state
laws or prohibitions.
China’s “new economy” entrepreneurs are reportedly eroding the state’s sphere of
influence and gaining a voice in policy-making, but they lack real political power. They
possess the capability of attracting relatively large amounts of foreign capital and the
potential capability of disseminating information on a vast scale. Some observers note that
Premier Zhu Rongji and many other reformers in the Communist Party leadership
acknowledge and support the desires of Chinese Internet and e-commerce visionaries to
create a stable legal foundation for the Internet industry, encourage foreign investment,
26 “Sohu’s Struggle,” Far Eastern Economic Review, June 8, 2000, p. 62.
27 Maggie Farley, “‘Cyberdissident’ in China on Trial for Subversion,” Los Angeles Times,
December 5, 1998, p. A1.
28 Maggie Farley, “Dissidents Hack Holes in China’s New Wall,” Los Angeles Times,
January 4, 1999, p. A1; Julie Schmit and Paul Wiseman, “Surfing the Dragon: Web Surfers
Find Cracks in Wall of Official China,” USA Today, March 15, 2000, p. 01B.

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break down China Telecom’s monopoly of the ISP sector, and restrain government
censorship of content.29 IT executives have formed industry organizations such as I & I
(Internet & Industry) and arranged regular meetings such as the Internet Content
Providers’ Management Summit to share information, coordinate activities, and present
their positions to MII and the State Council Information Office. In July 2000, private and
state-owned Web enterprises established the National Internet Society which plans to hold
symposiums and offer advice to Internet start-up companies.
However, the Internet industry also faces government opposition and ignorance and
lacks its own political connections and agenda. Many MII officials, Communist Party
conservatives, and heads of “old economy” state-owned industries fear losing political and
economic influence to the IT industry and have attempted to control its growth. Internet
industry leaders have complained that even many scientifically-trained government officials
lack sufficient understanding of high tech issues.30 Some analysts suggest that because of
their youth and independence, most Internet industry entrepreneurs remain largely outside
the political process. Many of them have expressed a disinterest in politics.31 Some of
China’s most disaffected groups, such as unemployed workers, have made little use of the
Internet to advance their causes.
U.S. Interests
Congressional Legislation
In the May 2000 House debates on H.R. 4444 granting China permanent normal
trade relations (PNTR) status, many proponents of the bill argued that the PRC’s
accession to the WTO would bolster American values and business interests in China.32
They cited studies claiming that China ranks among the fastest growing markets in the
world for personal computers, computer software, and telecommunications products and
services. Clinton administration officials and many Members of Congress argued that
American investment in China’s high technology sector would generate profits for
American businesses, spur research and development, and help maintain U.S. global
leadership in information technology (IT). Furthermore, proponents contended, it would
promote freedom and human rights in China by facilitating the access and exchange of
29 Scott Savitt, “China’s Internet Shakedown,” Asian Wall Street Journal, p. 10.
3 0 Interview with Chinese information industry analyst, July 2000; Gary Chen, “China
Internet: Government Tightens Controls, Clamps Down on News,” ChinaOnline.
31 “Wired China – The Flies Swarm In,” The Economist, July 22, 2000, pp. 24-6.
32 Some of the most powerful backers of PNTR status for China were leading technology
associations, such as the American Electronics Association. See Testimony of the U.S.
High-Tech Industry on China, Senate Finance Committee, February 23, 2000, and
Congressional Record, May 24, 2000.

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information and undermining the PRC government’s controls in these areas.33 Opponents,
on the other hand, retorted that the Communist Party’s political controls not only remained
undeterred by the Internet but also were enhanced by it.34
On March 11, 1999, H.Con.Res. 28, which urges the U.S. government to pass a
United Nations resolution criticizing China for its human rights abuses, passed the House.
The bill condemns China for, among other human rights violations, putting businessman Lin
Hai on trial because he allegedly provided e-mail addresses to a pro-democracy Internet
magazine based in the United States.35 On May 24, 2000, H.R. 4444 passed the House.
Title VII of the bill authorizes appropriations for international broadcasting operations,
including Voice of America and Radio Free Asia broadcasting and Radio Free Asia’s
Internet services to China.
WTO Provisions
According to China’s WTO agreements, the PRC (People’s Republic of China) is
to allow foreign investment in all telecommunications services for the first time, eliminate
tariffs on IT products, and grant foreign companies trading and distribution rights. The
PRC government has promised, for example, to open value-added telecommunications
services (including Internet, paging, and facsimile) to 50% foreign ownership within two
years of China’s accession to the WTO. The government has agreed to allow up to 49%
foreign equity in mobile telephone services within three years. It has assented to reduce
its tariffs on electronics (including computers, semiconductors, and Internet-related
equipment) from 13.3% to 0 by 2005. The PRC has promised to abide by the WTO
Basic Telecommunications Agreement (BTA) and WTO Information Technology
Agreement (ITA), by which WTO members open their telecommunications and IT
markets to other members.
U.S. companies have established a strong presence in computer and cellular
telephone manufacturing and sales, software development, and telecommunications
infrastructure in China. However, the PRC has been more protective of its fledgling
Internet industry; the government has generally welcomed American capital and expertise
but has been wary about foreign management or control. Analysts suggest that even after
China accedes to the WTO, foreign investors in telecommunications, especially Internet
services, may be caught in a tug-of-war between conservative and liberal Chinese
interpretations of WTO regulations. On the one hand, Minister of Information Industry Wu
Jichuan has reportedly opposed foreign investment in the Chinese Internet industry. On
the other hand, economic reformers, such as Premier Zhu Rongji, and many provincial and
municipal government officials have been more supportive of foreign investment and
increased competition in Internet goods and services.
33 M2Presswire, March 2, 2000.
34 Ellen Bork, “The Red Internet,” Washington Post, June 21, 2000.
35 Lin was released in March 2000 after serving 18 months in prison.

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U.S. Private Sector Involvement
Although Chinese Internet services have remained relatively closed to foreign
involvement, American companies have already made considerable progress in other
areas. U.S. high tech exports to the PRC increased over 500 percent between 1990 and
1998.36 American telecommunications and information technology firms have invested
heavily in products and systems that support Internet use in China. For example, Motorola
has committed $1.5 billion in direct investment and operates the largest wholly foreign-
owned subsidiary in the PRC.37 China Telecom has hired AT&T to help expand China’s
telephone lines and capabilities. In May 2000, AT&T entered into a joint-venture with
Shanghai Telecom, a subsidiary of China Telecom, and private investors to launch Internet
Protocol (IP) based broadband network services in Shanghai.38 Many American IT
companies have set up research and design centers in China that utilize local talent.
Motorola plans to open a micro chip design center in the city of Suzhou. Hewlett-Packard
has set up an “electronic services technology center” in Beijing. Microsoft is investing $80
million in a software research facility in Beijing – one of only two international research
facilities operated by Microsoft – and providing additional funds for Beijing University’s
new Law Center.39 Lucent Technologies plans to inject $15 million into a research and
development center in Shanghai, its largest R&D center in Asia.
American high tech, financial, and venture capital enterprises have injected an
estimated $200 million into China’s Internet industry.40 Many of China’s most influential
“dotcom”companies combine Chinese and American human and financial resources.
Many indigenous Chinese Internet entrepreneurs were educated in the United States. For
example, Sohu.com [http://www.Sohu.com.cn] is one of the leading Chinese Web portals
with over 2.3 million registered users. Charles Zhang, Sohu’s founder, is a Chinese
national who earned his doctorate at M.I.T. His financial backers include former M.I.T.
associates, Intel, and Dow Jones and well as Japanese and Chinese companies. Sina.com
[http://www.sina.com], one of China’s most popular Web sites, was created in 1998 via
a merger between a Bejiing high tech firm (Stone Group) and a Silicon Valley Internet
company. Sina.com developed its reputation for providing breaking news with its
36 U.S. exports of office machines and automatic data processing machines (computers) in
1999 totaled $843 million. See CRS Report RL30557, “China’s International Trade: Data
and Trends,” by (name redacted) and (name redacted).
37 Testimony of Christopher B. Galvin, Chairman and CEO, Motorola, before the Senate
Finance Committee, February 23, 2000.
38 Bien Perez, “AT&T to make Inroads: Landmark Broadband Joint Venture in Shanghai
Points to the Future for Foreign Companies,” South China Morning Post, May 30, 2000,
p. 1.
39 Jingjuan Hou, “Hewlett-Packard Offers E-Service Support,” China Daily, May 21, 2000;
Bill Gates, “Yes, More Trade With China,” Washington Post, May 23, 2000.
40 John Pomfret, op. cit.

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continuous coverage of the U.S. accidental bombing of the Chinese embassy in Belgrade
in May 1999.41 In July 2000, Sina.com began trading on the NASDAQ stock exchange.42
The Dow Jones Company is a major shareholder.
Etang.com [http://www.etang.com] is a new Chinese Internet portal targeting the
more individualistic and affluent younger (18-35) generation. Haisong Tang, Etang’s
Shanghainese founder, is a Harvard graduate who returned to China with other Harvard-
educated Chinese and $45 million in venture capital from the United States.43 Alibaba.com
[http://www.alibaba.com], a new e-commerce site, has garnered a global customer base
of 140,000 registered members from 188 countries, including 90,000 from China. Its
customer base is reportedly growing at a rate of 2,000 new members per day. The
company recently lured John Wu from Yahoo! to be its chief technology officer and raised
$20 million from Japan’s Softbank and $5 million from Goldman Sachs.44
It is difficult to make predictions about either American participation in the Chinese
Internet industry following China’s likely accession to the WTO or the Internet’s effects
upon Chinese politics. The Chinese government remains ambivalent toward foreign
investment and management in some areas, such as the ISP and ICP markets. The
industry’s laws and regulations are in flux. Nonetheless, U.S. companies have made
significant inroads in related sectors, such as computers, cell phones, and
telecommunications infrastructure. Furthermore, the level of U.S. venture capital in China’s
Internet services sector indicates strong American interest and commitment. However,
even as American and Chinese IT companies overcome economic hurdles, they will likely
face resistance from the PRC government if they are perceived to interfere with the
government’s efforts at maintaining social and political control.
41 Since embassy bombing, the Chinese government has restricted news reporting over the
Web.
42 “Biographic Profile: Zhang Chaoyang, Founder, CEO and President of Sohu.com,”
ChinaOnline; “Biographic Profile: Wang Zhidong: CEO and President of Sina.com,”
ChinaOnline.
43 Paul Mooney, “Etang.com Targets Chinese Yuppies,” ChinaOnline, March 2, 2000.
44 Ching-Ching Ni, “Yahoo Executive, Searching for New Challenge, Signs on With Chinese
Firm,” Los Angeles Times, May 15, 2000.

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