FEBRUARY 28, 2000 VOL. 155 NO. 8

China Dot Now
The world's last big communist state is hit by a wave of Web mania, and the bureaucrats are fighting to contain it
By TERRY MCCARTHY Beijing

William Ding, founder of Netease, one of China's top Internet portals, was uneasy. As he talked to a friend in a Beijing restaurant last summer, something was irritating him. The air-conditioning. It was too cold. Without interrupting the conversation, the self-taught techie took out his Palm Pilot electronic organizer, pointed the infrared port at the aircon unit and adjusted the temperature from across the room. His friend's jaw dropped.

Greg Girard/Contact Press Images for TIME

Ding is still uneasy--but this time he is on the verge of making 1.2 billion jaws drop. He and Charles Zhang of Sohu, another of China's major portals--or broad-based content providers--are vying to be the first mainland Internet entrepreneur to list his company on the tech-heavy U.S. stock exchange NASDAQ, which has become nirvana for online start-ups. The payoff will be crazy, 10-digit money.

The opportunities for growth are almost unlimited. So what makes Ding--and other Chinese Netrepreneurs--uneasy? The bureaucrats in Beijing, whose treatment of the Internet is even more erratic than the movement of the markets.

The Internet has hit the Chinese government with all the force of an electromagnetic burst. Net users, now 10 million strong, are doubling every six months--the fastest growth in Asia. Money is pouring in from American venture capitalists. Some 50,000 Chinese domain names--those Internet monikers like Netease.com and Sohu.com--have already been registered. BDA China, an Internet consultancy in Beijing, calculates that by 2005 China will have the largest population of Web surfers in the world after the U.S. Such a frenetic buildup would delight most governments. It terrifies the leaders in Beijing, who fear the Internet will vaporize their power over the masses. "It is not like anything they have ever experienced before," says Ding.

Suddenly China has become the cyberworld's hottest battlefield. On one side are the control freaks of the Communist Party, who believe anyone who challenges them belongs in a labor camp for 10 years. On the other are tech-savvy entrepreneurs who expect anyone who challenges them to set up a competing website within the next 10 minutes. The outcome of the conflict will not just determine whether Ding or Zhang become billionaires. It will also point the way toward China's future. Dotcoms are bringing into focus the central contradiction of China today: the drive to modernize without giving up one-party rule. The government would like to get in on the economic boom the Internet has brought to the U.S., but without any of the subversive ideas that Net surfers seem to come up with. The information revolution, minus the revolution.

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From the beginning, bureaucrats have desperately sought ways to manage this contradiction. In 1997 they set up an "intranet" with China-only access. It was quietly abandoned. In January they announced strict regulations on Internet content and enforced rules on encryption technology, electronic encoding used to protect data from being read by anyone but the intended recipient. The cyber élite in China yawned and went about business as usual. But after trailing behind the e-curve for so long, Beijing's bureaucrats have finally figured out where the Net is most vulnerable: in its voracious appetite for capital.

"The question is not whether China will pull the plug on the Internet," says Ted Dean of BDA. "It is whether China will regulate it in a way that will make it commercially unviable." After the phenomenal success last July of Hong Kong-based Chinadotcom's initial public offering (IPO) of shares, which valued the company at $1.5 billion, mainland firms have been keen to follow suit. Netease and Sohu both want to list on nasdaq this spring--Sohu has even made a preliminary filing with the U.S. Securities and Exchange Commission. According to bankers and industry sources, however, Beijing has blocked the ipo of a third contender, Sina, China's largest Internet company. Sina was seen to have bragged too openly about its ipo plans at the end of last year, and the government apparently decided to make an example of the company to reaffirm its own power.

And yet, foreign investors are clamoring to put money into Chinese online plays. "The risks of investing in China's Internet are just this side of ridiculous," says Johnny Chan, partner in Techpacific.com, one of the growing number of venture capital firms set up in Hong Kong to do just that--invest in China's Internet. "But the potential rewards are enormous."

It was this potential that persuaded Ding to set up Netease in 1997 in Ningbo province. Shy, bespectacled and an admirer of Yahoo! cofounder Jerry Yang, Ding was born in Ningbo and went to university in Chengdu before making his way south to Guangzhou. Working as a software programmer, he saved $60,000 to enroll at Stanford University but decided instead to set up his own Internet company in China. Ding chose an especially risky business model: he started by offering customers free e-mail and their own free websites. His friends kept asking him how he could make any money. "I told them we could increase traffic and get advertising. They said I was crazy." But Ding believes "free is the way of the future," since few people can afford to pay for e-mail or Internet content in a country where urban per capita disposable income was only $655 in 1998. Certain that the Chinese market would keep growing, Ding persevered: his site now claims to get a healthy 6 million page views a day, and he has attracted investment from Goldman Sachs, ING Baring, Softbank and Techpacific.com. Will Beijing allow him to continue expanding with financing from overseas? Yes, says Ding: "China needs to embrace high-tech in the 21st century, so it won't slow down the development of the Internet."

The conviction that China is riding the back of the technology tiger and cannot get off is widely shared in the industry. "It is a dilemma for bureaucrats," says Duncan Clark, a partner in BDA. "If they don't open up to the Net, they lose the economy. If they do open up, they lose control over society."

Actually they have already lost much of that control. Twenty years ago phone numbers were state secrets, jobs and housing were provided by the government and it was virtually impossible to relocate to another city. Log on to netease.com today: on the flea market page, mobile phones are on sale for $25 to $400. On the job site, Legend and Motorola are offering positions in Shanghai; elsewhere, a Ms. Liang is looking for a two-bedroom apartment near the main road in Guangzhou's Tianhe district for as much as $160 a month, and the fashion site has a swimsuit page. In a chat room called "Sleepless Beijing nights," two Web surfers with the user names "coolguy" and "angle" are flirting with "egirl." Another chat room is available for those wanting to know how to get a visa to study in the U.S. There is news of the American presidential primaries, the sentencing of two Chinese who hijacked a plane to Taiwan and a major drug bust in Australia. And on the sports page is the story of Gao Feng, a temperamental top scorer in the Chinese Soccer League who has been transferred to the Shenyang Sea Lions and denies he is "hard to manage."

William Ding comes from a new class of Chinese Net entrepreneurs who are, by any definition, "hard to manage." Many are self-taught, come from poor families with no special connections and have relied on their brainpower to crack the Internet and set up their own companies. "People used to think you could get rich only with stocks or smuggling," says Wang Zhidong, chief executive of Sina. "Now with the Internet they know they can get rich using their intelligence." As recently as a year ago top graduates of China's best universities applied for further study in the U.S. as a matter of course. No longer. Now the smartest of the smart are converging on the Haidian district in northwest Beijing, home of Qinghua and Peking universities, as well as lots of computer hardware and software stores. In this scrappy, post-industrial precinct of neon-lit shopfronts, abandoned building sites and empty factories, an entrepreneur can rent a room or two, buy or borrow a few computers and several crates of instant noodles, and become a dotcom overnight.

TIME Asia's Singapore correspondent Eric Ellis is one of our regular columnists for Asia Buzz, covering the rise of high technology and the Internet in Asia twice weekly. Search here for his recent tales from the worlds of technology and the Internet

Haidian is a dreamworld for Chinese with ambition and tech-savvy. Salaries are spiraling--the going rate for a university graduate with elementary computer skills is about $1,000 a month (Beijing's average wage: $200). Returnees from U.S. high-tech and consulting firms command $100,000 a year, plus stock options. "The interesting thing the Internet has brought to China is role models," says Clark of BDA. "In the '80s the winners were corrupt party cadres. Today people can look up to William Ding, Jerry Yang or Wang Zhidong." Now there is a reason to stay in China--or come back from a lucrative career in the U.S. Says Jack Ma, head of Alibaba, a business-to-business electronic commerce site based in Hangzhou: "This is the first time we Chinese see a way we can catch up. It's a new industry defining the new century. Just like the auto industry defined the Japanese economy--if you catch the wave, you can move the whole country forward."

The sense of empowerment and pride in modernizing China through the Internet is spurring a new sense of nationalism--one for which the government doesn't hold the franchise. Many Chinese see the Internet as a way of leapfrogging technology to draw level with the West. This feeling is even spreading overseas. China Eastern's twice-weekly Flight 581 linking Beijing with San Francisco is full of Chinese Internet whizzes commuting between Haidian and Silicon Valley. "Chinese in the Valley are talking all the time about going back to China now," says Charles Chao, who is based in Sunnyvale, California and recently joined Sina's U.S. office as vice president of finance. "The incentive is there. The only holdup is the policy issue."

The "policy issue" is what makes the Chinese Internet market so risky. The government in Beijing is still playing catch-up with an industry that changes faster than bureaucrats can prepare briefing papers for ministers to read, so investors need steady nerves. To be sure, there are still restrictions on what Internet content providers can put on their news sites. The latest content regulations, which have caused consternation in the foreign media, ban the dissemination of "state secrets" on the Web--bringing the Internet into line with rules governing print media. Of course, the definition of "state secrets" remains vague. Still, no Chinese Internet company is interested in a political challenge to Beijing, and the three main portals--Sina, Netease and Sohu--maintain staffs of monitors to delete anti-government material from their message boards and chat rooms. "We saw this coming. I think people are overreacting to the announcements," says Victor Koo, senior vice president of Sohu. The government's drawing up of regulations, he believes, "is an ongoing process that people in the business know is evolving. We have to find a way to work around it."

In fact, limits on content are increasingly meaningless, as surfers can easily reach foreign news sites. Even those that are banned, like CNN and the New York Times, are routinely browsed through proxy servers, which allow users to access banned sites without being identified to the government-run servers. "These rules may be currently difficult to enforce," conceded a spokesman for the State Secrets Bureau. "But it's important that we set up regulations before the Internet becomes uncontrollable."

Beijing's demand that companies register their encryption technology--the coding that protects websites and Internet traffic from unauthorized use--is also being treated as less serious than it first appeared. Many companies have declined to register, saying it would compromise commercial secrets and limit e-commerce: Who would use the Internet for purchases if it weren't secure? U.S. Trade Representative Charlene Barshefsky has taken up the matter with the Chinese government. She argues it contravenes the trade agreement China signed with the U.S. last November.

The most serious hurdle is the uncertainty over foreign funding and IPOs, which has brought out the worst instincts of the government. "All these bureaucrats say to the entrepreneurs, 'You young guys, you have some American friends and loads of money, where do we get our share?'" says Xie Wen, executive vice-president of CIS, a Beijing company that runs an online games site. Asks Clark of BDA: "When you get private entrepreneurs in China who are billionaires, is that acceptable? How will that go down? This is Chinese culture mixing with New York capitalism. You are going to have some pretty bizarre side effects."

Beijing is heaving with government agencies that want to get involved in approving Internet IPOs--the Ministry of Information Industries, the China Securities Regulatory Commission, the State Council's Information Office and even the Xinhua News Agency. Many of China's official media outlets feel left behind by the Internet craze and are lobbying the government to hold back Web companies so they can catch up.

But despite the regulatory headaches, Internet firms continue to expand and multiply. The enthusiasm is infectious. A Beijing Daily story in December carried the headline, "The Internet Economy: the Bubble That Cannot Burst." Online job listings for Internet start-ups receive thousands of responses. Nearly every bus in Shanghai and Beijing has dotcom advertisements on its sides. The print media are full of Internet promotional material.

China is now in the midst of a titanic battle over the flow of information. The freedom of the Internet will inevitably win out over totalitarian control in the long run, and China will be refashioned in some as yet unimaginable way. "The Internet will bring major political change to China," says Charles Zhang of Sohu. "But it will be gradual, as people have more information at their fingertips." It is the beginning of the endgame for the Communist Party, and some of the younger bureaucrats already sense that, even as their conservative colleagues reach for the old levers of control. But the Internet has no printing presses to shut down, no party structure to infiltrate. It is vapor, everywhere and nowhere, indispensable and unstoppable. The real battle is not over letting it in, but about who will benefit, and how quickly, from a wired China.

With reporting by Hannah Beech/Beijing

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