Iron Fist or Velvet Glove?

As the U.S. government struggles to reconcile China's human rights track record with a more favorable trade status, the Internet industry has a Chinese puzzle of its own: how to best invest in one of the world's largest but unpredictable markets.

CBS.com reports on President Clinton's trip to China

At stake is the burgeoning potential of China's marketplace for information and Internet technology. Analysts predict that China's estimated $6.8 billion market for computers could grow to $22.5 billion within two years, while its telecom industry could hit the $7.5 billion mark.

The Internet Picture
On the Internet front, according to various estimates, China has some 600,000 Internet users, and a handful of Internet service providers. Industry analysts predict that China's Net audience will expand to 7 million users within 3 years. While this remains a small percentage of China's 1.2 billion population, it will most likely be a fair sampling of China's elite, wealthier population – an attractive market by any measure.

But to reach that market, foreign firms have to deal with China's still-primitive telecommunications network, where service outages for Internet users remain a daily problem. While few firms have had the stomach to help China build a better network, many are willing to contribute know-how. In April, IBM announced an electronic commerce partnership with China's phone company China Telecom.

Box Builders
Also, several firms have focused intently in recent months to ensure China won't run out of computers. The country, which snapped up some 700,000 PCs to date, will get a new plant in the southeastern city of Xiamen, courtesy of computer giant Dell, which got the government's okay in February. In a more domestic push to stay on top of China's PC market, Chinese computer maker Legend Group took $120 million worth of bank loans in April – a high water mark for domestic information technology. The theory seems to be: get computers into the hands of the people and the rest will follow.

The Content Question
U.S. Internet firms have been hard at work creating Chinese-language sites, aimed both at China's native population, as well as millions of overseas Chinese worldwide.

The most recent arrivals include Netscape and Yahoo – two of the Net's most trafficked sites. In May, Netscape announced it would launch a software search and sales service in partnership with Hong Kong-based China Interet Corporation. The service will compete with a number of search sites, including Yahoo's recently-launched search service, dubbed Sohoo. Similarly, America Online in February allied with Hong Kong-based China Internet Corporation (CIC) to offer a bilingual online service to Hong Kong-based customers within the next year.

Iron Fist or Velvet Glove?
In the meantime, China's often stringent Internet policies and primitive communications infrastructure could restrain the Net's popularity. Computer users in China continue to suffer from brown-outs. Internet access is spotty at best, with daily outages lasting for hours.

In addition, computer users and Internet access providers face stringent regulations on what they can post, download and view.

As recently as December 1997, China cracked down on the Internet, claiming the medium was being used to distribute state secrets and support dissident activities. At the time, state-owned news agency Xinhua reported that new Chinese rules would make it a criminal offense to use the Internet for distributing classified information, political dissent or to defame government agencies. The new rules also made the distribution of pornography punishable by fines and as-yet-unclear criminal sanctions, both for the Internet service provider and the Internet user.

A year earlier, the Chinese government moved to block more than 100 Web sites considered by the government to be either politically dangerous, or pornographic. Interestingly, the mix of banned sites included those of CNN, The Wall Street Journal, The Washington Post, and the Los Angeles Times. Additional sites blocked include Taiwanese dissident home pages, and those of groups that monitor China's blackened human rights record, like Amnesty International. Users who attempted to reach those sites never got an error message – the site request simply went unanswered.

Whether the restrictions will remain or retire under the new premier remains unclear. China appears willing to open itself up to foreign investment. But it's unclear whether China's new regime will be willing to relax its restrictions on Net access and use.

Written By Sean Wolfe