China gripped by Internet revival

In a throwback to the Internet heyday of the late 1990s, Chinese dot-coms are attracting more attention than ever as U.S. companies and venture capital firms pour money into the region.

Interest in China's Internet sector took off after last week's successful U.S. stock listing by Chinese search engine Baidu.com Inc. The company's stock quadrupled to $122.54 per share in its first trading day on the Nasdaq, the best opening day for a stock since 1999.

"You see why the U.S. venture capitalists are so interested to get into China when you look at what happened with Baidu," said Paul Mackintosh, managing editor of the Hong Kong-based Asian Venture Capital Journal.

Other Chinese dot-coms have been attracting attention, too. Yahoo Inc. ponied up $1 billion in cash Thursday for a stake in Chinese e-commerce firm Alibaba.com Corp. and said the two companies will work together in an exclusive partnership in China.

In addition, Netease.com Inc. shares jumped 21.5 percent last Wednesday after the Internet portal, which boasts some of China's most popular online games, said its second quarter revenue soared 90 percent and net profit rose 147 percent from the same time a year ago.

"We're seeing massive interest from American venture capitalists in China, the Internet especially," said Mackintosh. The Asian Venture Capital Journal, which also tracks investment flows, said investment funds in Asia rose to a record high US$111 billion at the end of June. The company cannot break the figure down by country, but much of that money is likely tied up in China, Mackintosh said.

The investment activity is reminiscent of the dot-com madness that hit the U.S. in the late 1990s. Chinese firms began to benefit at the tail-end of that cycle, but when the bubble burst and U.S. stock markets crashed in 2000, investor interest faded and Chinese companies were left to make do on their own. But time and investments in Chinese Internet companies by the likes of Yahoo Inc. and eBay Inc. have healed the wound. The Baidu.com public offering cemented the revival, and new venture capital money is now coming back to China.

"The focus on China's Internet sector is no big surprise considering the growth exhibited to date and its perceived potential," said William Bao Bean, who covers China's dot-com scene for Deutsche Bank Securities in Hong Kong. In terms of Internet users, the numbers are compelling, he says.

China ranks behind only the U.S. in terms of total Internet users, with 103 million, according to the China Internet Network Information Center, the country's official Internet data collector. While that's only about half the number of users in the U.S., it accounts for only 8 percent of China's population, compared to nearly 69 percent for the U.S.

Proponents of China's Internet revival say the low penetration rate means there's a lot of room to grow. U.S. companies seem to agree. In February, eBay Inc. Chief Executive Officer Meg Whitman called China the largest e-commerce opportunity around. In five to 10 years, she said, a company's share of e-commerce in the nation would likely be the defining measure of Internet business success.