China Rejects Foreign Internet Investments

Despite encouraging signs from China during the recent World Trade Organization (WTO) meeting in Seattle, Washington, Chinese Minister of Information Industry Wu Jichuan has said that China will strictly limit foreign investment in Internet companies.

According to Wu, foreign companies with investments in Chinese industry are "in violation of current Chinese policies." This statement comes as a jolt to major players in the burgeoning e-commerce industry that have already invested in China, including Intel (Nasdaq: INTC), IBM (NYSE: IBM) and Yahoo!.

For its part, Intel declared that China is essential to the growth of e-commerce in November.

For much of this year, Chinese officials have been unclear about their position regarding foreign investments in the Chinese Internet culture. Although officials have met with American technology leaders, and major U.S. players have made significant investments in China's Internet industries, China never stated its acceptance of international commerce.

Existing Investors in Peril

Those companies that have invested in China are now in a sort of legal limbo. Regarding firms that have violated Chinese trade policy, Wu said, "We shall find an appropriate way to address it."

Wu's statements do not bode well for the growth of international e-commerce, since China represents the largest population center in the world. Without China's participation, international e-commerce will not stall, but the pace of expansion will certainly be slowed.

Prior to the WTO meeting, China had indicated its willingness to at least consider foreign investments. Following the meeting, U.S. trade representative Charlene Barshefsky assured U.S. companies that the ban on foreign investments was "no longer an issue."

To the contrary, China has ordered foreign telecommunications companies to withdraw $1.4 billion (US$) of investments in Chinese networks.

Investors Gambled

Those U.S. companies that did invest in China did so in the spirit of calculated risk. As recently as last month, Chang Xiaobing of China's Ministry of Information Industry reiterated China's resistance to foreign investment, telling foreign companies that they were investing at their own risk.

However, after a WTO deal between the U.S. and China, major technology firms felt that the restrictions would be lifted. At the very least, companies with capital already invested in China had hoped their investments would be honored under a grandfathering plan that would benefit both the U.S. and China. That scenario now seems unlikely.

How China Will Be Affected

While U.S. technology firms have relied heavily on venture capitalists for their development, China has no such system in place. Without foreign investment in Chinese technology companies, the country must rely on domestic capital for startups. That situation will likely limit the development of the Internet culture in China.

If U.S. companies are allowed to form limited partnerships with Chinese firms, some U.S. firms may opt not to participate, since their decision-making power and control over the business would be limited to what China decides is appropriate.

Also challenging to U.S. companies is Wu's announcement that China will institute a licensing plan for all businesses. Even if a foreign business makes inroads in investing in China, the government can stop the process at any time by denying a license application.

China has already suffered losses with its restrictive policies and its recent indications that foreign investments might be rejected. Yahoo!, for example, channeled some of its investment capital in other directions last month.