Fortune at China's fingertips
by Jasper Becker
South China Morning Post

Rock band Tang Dynasty was serenading a crowd of Beijing trendies, tucking into free drinks and a buffet at a party hosted by one of China's hottest Internet entrepreneurs. Giggling girls queued to be photographed next to Charles Zhang, founder of Sohu.com, who may be about to make a fortune from the mainland's next big thing: e-commerce.

One of his rivals, 28-year-old Jiang Jining has called his company NetBig.com, and like everyone else in the game is preparing, no, he insists, is about to list on Nasdaq in New York and become immensely rich overnight. "We have friends on Wall Street. It will be easy for us," he said. With American investors waiting to pour millions into the China Internet dream, such twenty-something entrepreneurs are no longer treated as nerds but more like petulant rock stars.

Suddenly China seems to have as many young, budding Internet entrepreneurs as it had democracy leaders a decade ago. Only one stock, China.com, which has the giant America Online as its partner, has listed on Nasdaq. But the example is inspiring many.

Mr Zhang told everyone who would listen that Sohu will list in 2001 or maybe even next year. Meantime, he has been trying to raise the profile of his Internet site by hosting a series of parties called "Sohu Fashion Life Pub Week" at a string of Sohu pubs. But many of those attending one particular bash said they rarely used a computer or went on-line. "But some of my friends are addicted. They are constantly on-line during their free time, surfing the Web to play computer games," said a mainland student.

Two of the most successful Internet portals cater to just such users: NetBig offers information on universities - including the first ranking list - and Global link, the largest gaming site in China. The real dream of each hopeful is to build a "community" of dedicated users as a base for selling advertising and e-commerce services such as on-line shopping or on-line stock trading.

"The Internet cafe is just a bait. I want to get into e-commerce,' said Zeng Qiang, founder of Sparkice, which set up a chain of Internet cafes in 1996. Mr Zeng has found the going tough despite raising millions of dollars from US investors like Cybercash. Unlike the US, few mainlanders have credit cards, and very few credit cards backed by hard currency deposits to buy things over the net. And it could take a long time for people to shed their reservations about buying on credit.

Mr Zeng, who graduated from the prestigious science University of Qinghua and went on to study in America, has changed his strategy. He is trying to use his Sparkice Web site to allow Chinese toy makers to sell their products to customers in the US. Another hopeful, Liang Shunjun, who studied at Stanford and returned to China after 10 years and bought a shell company listed in America to raise capital, started a similar business called Hyperlink. He provides information about the businesses of 1,000 Chinese exporters who pay him a fee, but hopes to organise on-line trading. So far the number of visitors to his site is only 30,000 to 40,000 a day, but he thinks he can list on Nasdaq and raise US$35 million (about HK$270 million). Ding Lei, another 28-year-old, who founded Netease, is already trying to sell through the Internet. Last month his company sold 110 Great Wall brand computers in just 10 days, and is moving on to selling Kodak digital cameras. "It is not really on-line shopping. It is cash on delivery. Someone orders on-line. Then we call to confirm it and afterwards the manufacturer's agents will deliver the products," he explained. He has no foreign investors and made his start-up capital by designing and selling software for an automatic telecom billing program. With 500,000 yuan (about HK$469,000) he set up NetEase, which now employs 80 people and is still losing money. The site is popular. It offers a free mail service and news taken from domestic newspapers, but attracts little in advertising revenue.

No one is making much money from selling or buying advertising. BDA, a China-based Internet consultancy, thinks that last year the advertising revenues on Web sites amounted to a paltry US$3 million. E-commerce may be the big hope, but a US Embassy study of its prospects in China (posted on its Web site) was not optimistic. "Internet and retail electronic commerce in China are handicapped by a government focus on the development of a centrally-controlled e-commerce system and the lack of convenient methods to make payments - which experts say is as much a cultural issue as a technical one," it concluded.

The government prefers a cyberspace that acts as a wholesale clearing house for domestic companies because it believes it must control and monitor trade. But Wang Boming, executive vice-president at China's Stock Exchange Council, believes that change is imminent. He helped set up Homeway (in which the South China Morning Post has taken a stake) which offers financial information and real time stock figures, but could quickly provide other services like stock trading if the Internet takes off. "I think 1999 will be a turning point and we will be into an accelerating growth period . . You can never be too optimistic," Mr Wang said. In the near future his company will offer its customers the chance to deal in foreign currencies on line. Internet banking and real-time stock trading could be next if the regulatory environment were to change.

Financial services might therefore be the first sector where e-commerce takes off and becomes profitable in China. Optimists like Mr Wang like to point out that no one could have predicted just how quickly the telecommunications revolution has swept China.
 In 1985 hardly anyone, even in Beijing, had a private telephone line but now there are 100 million lines and just as many people have mobile phones or pagers. The cost of communications keeps dropping, too. The number of computers available is growing fast. Some predict there will be 30 million by 2003. What really excites some observers is that they also detect a change in government attitudes to science and technology development. For the past 20 years the mainland has relied on the government to propel itself to the forefront of technology.

A series of programmes, the Torch Plan, the Spark Plan, and others with military codes like Project 909 to build a semi-conductor plant, have been loudly trumpeted. To spur the proliferation of hi-tech companies every region rushed to set up its hi-tech zone: there are 52 in the country, little more than office blocks in paddy fields. China's state-directed science programme has had little success in nurturing start-ups. They cannot be planned, it seems. A few exceptions have grown into competitive companies like the military-backed Huawei company in Shenzhen which manufactures telephone switching systems, Legend which makes PCs, and Founder which developed software for printing Chinese characters.

Even efforts to press foreign investors to transfer strategic technology like NEC's silicon wafer manufacturing plant in Shanghai have run into problems: it came on-line just as worldwide over-capacity brought a collapse in prices. Many of China's state-run laboratories are being closed and the generation of scientists who staffed them and the top universities are retiring. Three-quarters of the brightest students who go abroad to study never return.

Faced with this crisis, the Government announces new programmes almost every year. This month a package of measures was announced by the Ministry of Science and Technology. The priority was providing venture capital to small start-ups who cannot raise money from the banking system. Another change was signs of a wish to enforce the protection of intellectual property rights. Last month saw the first successful prosecution for software theft in a mainland court.

Shanghai is about to become the first city to set up its own venture capital fund with 600 million yuan provided by the state and Shanghai Industrial Holdings. "For this we are now trying to find professional management companies. This is quite different from what we used to do and what others are doing now in China,' said spokeswoman Wang Ting at Shanghai Venture Capital. "We will find one to search out good information technology companies, find another to do new medicine projects and another for hi-tech materials." For Wang Boming, whose company is bidding to manage one of the funds, this shows that for the first time, government officials have accepted they are not the best qualified to pick winners.

Other cities are likely to follow suit as new batches of measures designed to attract brains back from abroad come into effect. That, and the example of youthful Internet entrepreneurs like Mr Zhang or Mr Zeng who returned from the US, could encourage others to return and try their luck.
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