Yahoo's fingering of reporter hurts
tech funding By James Borton
Washington is a complex welter of emotions
on China. Lately, each day there appear to be
fewer "panda huggers" in the US State Department,
and at the Pentagon they have become scarcer
still. Beijing's sentencing of Chinese journalist
Shi Tao to 10 years in prison after he e-mailed
comments made in a newspaper staff meeting to a
New York-based democracy group has only
exacerbated this trend. The notes, which concerned
overseas Chinese returning for the 15th
anniversary of the Tiananmen massacre, led to his
arrest last November and a conviction this April
for "providing state secrets abroad".
While similar cases have occurred before,
what made this one different is that the Chinese
police tracked down Shi with the help of US-based
Internet portal Yahoo. In a widely circulated news
bulletin, Reporters Without Borders, a press
freedom group, revealed last week that Yahoo
Holdings (Hong Kong) had provided Chinese
authorities with details that helped to identify
and convict Shi, who was sentenced in April of
this year. Yahoo's apparent
complicity has created an
uproar abroad and contributed to a wave of
anti-Chinese government sentiment in the US, which
comes not only in the wake of a meeting between
President George Bush and President Hu Jintao in
New York, but just as a movement to rein in
technology investments in mainland China has been
finding increasing support within the influential
US-China Economic Security Commission.
According to the Associated Press, the
verdict in the case reveals that Yahoo gave the
Chinese authorities access to Shi's personal Yahoo
email account, the message that contained what
they deemed a "state secret" he was convicted of
leaking, and his computer's identifying IP
address. Jerry Yang, the company's co-founder, was
in the limelight this past weekend at the
high-profile Alibaba-sponsored China Internet
Summit in Hangzhou. Queried at the summit, Yang
offered little explanation on the sentencing of
the former writer for the financial publication,
Contemporary Business News. The demand for the
information was a "legal order" and "Yahoo
receives such requests from law enforcement
agencies all the time, and not just in China,"
Yang revealed.
Yahoo has no intention of
running afoul of China's draconian Internet rules;
the company knows that if it alienates the Chinese
government, it might lose its valuable seat at
what will soon become the world's biggest Internet
party. This would allow Chinese rivals like
Sohu.com to take a prominent market position since
their senior management has already demonstrated
they will dance to the CCP's tune. The paradox is
alarming. Only last month, Yahoo trumpeted its
US$1 billion investment for a 40% stake in
Alibaba.com, the underperforming e-commerce
platform operating in China - now the company
appears to be an informer to the state security
authorites. What raises the stakes in the Shi Tao
affair is that China's Internet industry has
become a major target of investment for overseas
venture capital firms.
Venture capital
pouring into Internet sector The investment
gates remain open in China's Internet marketplace.
With China's Internet population swelling to over
105 million users, private equity investors are
flooding the country with more funds for the
nation's digital media. "The massive pent-up
demand for intriguing content and applications
after decades of rigid government control makes
the Chinese population particularly open and
receptive to novelty, because there are not any
types of entrenched user behavior or habits.
Having leapfrogged intermediate generations of
technologies, China is in a unique position to
install and embrace next-generation communication
and media platforms," claims venture capitalist
and Gobi Ventures partner, Lawrence Tse. Tse's
venture company, along with NTT, DoCoMo and
Dentsu, has led follow-up rounds of financing for
Lingtu and DMG.
Gobi Ventures, Intel
Capital, along with scores of Silicon Valley
venture capitalists, are banking on not only
smooth sailing with regulatory issues, but believe
that these digital developments will change how
enterprises and individuals communicate and
interact. The investment attitude is also widely
supported by another recent bullish Morgan Stanley
China Internet report, written by the cheerleading
dotcom analyst, Mary Meeker. That report states,
"We are initiating coverage of the China Internet
industry with an attractive view. We believe
Chinese Internet companies that focus on creating
consumer value have the highest potential to
create shareholder value. China is No 1 in the
world in mobile subscribers and No 1 in Internet
users under the age of 30 - this evolving presence
on the world stage should not be underestimated."
For sure, China is in an enviable position
to embrace next-generation communication and media
platforms. However, 100 million Internet users do
not make this anything close to Beijing's "Third
Technological Revolution" and cannot be remotely
compared to Mao's bold Great Leap Forward.
US worries over technology
transfer The concern in Washington is that
American private equity investments placed in
Chinese tech companies will be absorbed into
China's ubiquitous military-industrial complex.
Chinese leaders' policies of "reinvigorating the
nation through technology" date back to the 1988
"Torch Plan", promoted by former president, Jiang
Zemin, which was designed to develop and
commercialize high-technology products, and
promoted by the State Department of Science and
Technology.
Last month, the bi-partisan
US-China Economic Security Review Commission
conducted a public hearing on "China and Capital
Markets", held at a time when most congressmen and
policy pundits were on summer holiday. The
commission sought to better understand the
strategy and objectives employed by Chinese firms
as they try to raise capital in global capital
markets. On this occasion, commission members
expressed concerns that the Chinese government's
roadmap for an ever-increasing number of selected
high-tech IPOs on NASDAQ might undermine and pose
a direct challenge to US competitiveness in
technology development.
It was only one
year ago that the members of the same commission,
including co-chairmen Richard D'Amato and Roger W
Robinson Jr, chastised American venture
capitalists for funding Chinese tech companies. At
that time, the commission made the following
policy recommendations:
Congress should bar US institutional or
private investors from making debt or equity
investments, directly or indirectly, in firms
identified and sanctioned by the US government for
weapons proliferation-related activities, whether
they are listed and traded in the United States or
in the Chinese or other international capital
markets.
What China does with its growing technology
capabilities - whether it converts them to
military uses and/or to control the free flow of
information to its population - is of direct
national security concern to the United States.
Moreover, the extent to which these advances allow
China to challenge US competitiveness in
technological development is a vital matter for US
economic security.
The effect of an
opening statement made at last month's hearing by
chairman C Richard D'Amato was to put the brakes
on any Chinese plans to access US capital markets
for high-technology development. "As Chinese
financial institutions prepare for an estimated
combined $15 billion in listings, questions need
to be raised regarding the loan portfolios of
these institutions. I am concerned that US
investors may not have sufficient information to
make informed decisions about the risk of these
investments. Furthermore, the possible links
between listed state-run firms and banks and
China's military industrial complex has heretofore
lacked comprehensive examination," stated D'Amato.
After all the buzz on China related to
Baidu and Google's deal with Alibaba, few are in
doubt any longer that the Chinese are capable of
launching high-tech companies that are innovating
brilliantly and exploiting existing capital
markets to advance their development. The facts
are crystal clear: China is one of the world's
most promising end markets for technology, whereas
America, while it will remain an enormous market,
may have reached a consumption saturation point.
So the real issue for the remainder of the decade
isn't whether China workers will steal US
high-tech jobs; or US venture capital investment
funds SOEs that lack transparency; or
semiconductor manufacturing will drift away from
Silicon Valley, or China's Communists will
maintain their tight control of the media - it may
simply be a well-grounded fear that the high-tech
consumers in China's expanding middle class will
not buy US products.
James
Borton is an independent journalist. He writes
on China's private equity developments at www.ChinaVentureNews.com.
(Copyright 2005 Asia Times Online Ltd. All
rights reserved. Please contact us for information
on sales, syndication and republishing.)
