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One Word, Son: China.com

James Surowiecki
Posted Monday, Nov. 15, 1999, at 6:46 PM ET

You might have thought the biggest winner on Wall Street in the wake of the United States and China's agreement on terms for China to enter the World Trade Organization would have been the company that's been loudest in its support for Chinese entry, namely Boeing. But in what may be yet another sign of the advent of an economy based on bits and not atoms--or at least of the mainstream acceptance of the idea of that economy--the biggest winner today, by far, was (what a shock!) an Internet company. Chinese-language content provider China.com's shares rose 75 percent today on news of the accord, raising the company's market cap to $2 billion.

China.com went public as a Nasdaq stock--meaning that its actual shares trade on the Nasdaq, as opposed to what are called American depositary receipts--in July, and its shares have now risen more than fourfold. The leap today was prompted by one of China's key concessions to the United States, to allow foreign equity investment--up to 50 percent--in both Chinese-owned telecommunications companies and Internet companies. This was a pretty significant about-face, considering that just two months ago, the Chinese government took a public stand against foreign involvement in the Chinese Internet industry, and that many thought that the government would draw a line around the Net, even if it conceded on telecom. Today's concessions open the door to myriad partnerships--how far off can AOL China be?--and the idea seems to be that China.com has a key foothold in the market.

When you consider that China.com has only 750,000 registered users in a country of more than a billion people, calling its foothold "key" seems rather dubious. But the truth is that it's next to impossible to think about business in China in free-market terms. In a real market, brands are vulnerable, and first-mover advantages--like the ones that Compuserve and Prodigy had in Internet access in the United States, for example--can be lost as a result of competition. But in a market in which political connections remain essential and state intervention can come at any time, a first-mover advantage, insofar as it seems to reflect state sanction, if not support, appears to be rather more significant.

The paradox inherent in all of this, of course, is that the Internet really is an incredibly destabilizing technology, both economically and politically, and yet the Chinese government is doing its best to hold it fixed, even though holding it fixed (if that's possible) is the best way to destroy its value. The viral spread of information on the Internet, the incredibly rapid and inexpensive growth of user communities and businesses, the facilitation of global market relationships: These are the hallmarks of the Net--not merely in the minds of the digerati but also in the minds of investors. They're the only things that make a company like Yahoo worth $50 billion or a company like China.com worth $2 billion. Yet these are the things--even after today's accord--for which the Chinese government has very little affection.

The romantic idea is that the combination of real free trade, the Internet, and modern telecommunications will eventually bring down the hidebound political and economic structures that still rule China. Now, the romantic idea may be right, and greater access to the Net and greater free trade are certainly good things. But the truth, banal as it may seem, is that we still don't really know very much about how the potentially democratizing Internet really functions in a thoroughly undemocratic society, just as we don't really know very much about how the market-revolutionizing Internet functions in a non-capitalist economy. Obviously, if the romantic idea is right, the upside is so immense that today's $750 million rise in China.com's market cap will be a mere drop in the bucket. But in a way the company's name is the perfect conjoining of two words--China and .com--whose real value lies not in what is but only (always?) in what may be.

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James Surowiecki writes the financial column at The New Yorker.
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