Sunday, September 11, 2011

The internet and China's rule-of-law games 婊子牌坊-中共的“法制”

Chinese information control 中共党朝的“阴阳”互联网

File: Chinese websurfers are seen at an Internet cafe in central China's Anhui province. (AFP)

Kai Chen Blog:

陈凯一语 Kai Chen's Words:

这篇分析文章揭露了中国专制文化的精髓 -- 非良知非理性逻辑的走捷径/婊子牌坊的“筑尿盆”心态。 要经济成长而不要自由,要互联网而不要真实信息,要法制而不要制约政府。 这就是“中式”精神分裂症。

This article by Joe Sternberg reveals the essence of Chinese despotism - a schizophrenic search for an one-end stick. Wanting economic growth yet denying freedom of information flow, wanting the Internet to make money yet restricting communication between individuals, wanting laws to control the population yet protecting the government from the law.... This is indeed the Chinese-style insanity.


The internet and China's rule-of-law games

09-SEP-2011 Intellasia | Wall Street Journal


9 Sep, 2011 - 7:00:00 AM

Every day Beijing grows more uncomfortable with the degree of free communications it has accidentally allowed in China. Witness a growing list of commentaries appearing in official media outlets directed especially at Sina Corp.'s Weibo, the Chinese version of Twitter. The site sparked authoritarian concern in the weeks after late July's deadly high-speed train crash in Wenzhou. Weibo became a conduit for inconvenient truths and cynical speculations about the accident. The Communist Party sees a huge threat.

This is as much a business story as it is a free-speech issue. In short, over the years Beijing has made certain decisions about how it would interact with the business world, especially concerning the rule of law. Those decisions are coming back to haunt the Communist Party.

A column published last week in People's Daily, the party's main mouthpiece, is inadvertently revealing. "We have failed to take into sufficient account just how much the Internet is a double-edged sword, and have a problem of allowing technology to advance while administration and regulation lag," the newspaper said, as quoted by Reuters, the emphasis ours. It's a telling remark because the italicised portion is false.

The fact is that Sina Weibo already is illegal. In the distant, misty reaches of history - April 13, 2000, to be exact - the site's parent company, Internet firm Sina, offered its shares on the Nasdaq. This extraction of Western capital from a Western market contravened the black-letter Chinese law that bars foreign investment in sensitive sectors such as Internet services.

This law existed precisely because the party understood the threat a vibrant Internet communications industry would pose. Yet by 2000, it also was clear that Beijing would need to allow some form of the Internet for the economy to thrive, and that the capital for doing so on a Chinese scale was overseas. Beijing discovered, not for the first or last time, that the "rule of law" in China was incompatible with economic growth.

So a fudge was found. Sina and every other Chinese Internet company listed in the West created what are called variable-interest entities, or VIEs. Western investors buy shares in an offshore holding company that owns a Chinese shell company. The actual Internet business remains wholly "owned" by its Chinese founders, but they engineer a series of contracts through which the Internet company agrees to pass along all its revenues and the like to the foreign-owned Chinese company. Accounting rules then allow the listed company to publish consolidated books as if it and the Internet firm were one and the same. They're not.

Beijing has never explicitly said that this trick is legal. Everyone has simply assumed it is because Beijing was content to allow Sina's IPO, and so many since, to proceed using this VIE structure. But Beijing could change its mind at any moment, "discover" the VIE trick has been used to circumvent foreign ownership restrictions, and crack down. It's one of the investment risks buried in each of Sina's annual filings to the Securities and Exchange Commission, and similar warnings lurk in every other IPO done through a VIE structure.

In this sense, the Communist Party's solution to Weibo ought to be simple - shut it down. Since the VIE structure so obviously violates the spirit of the relevant Chinese laws, Beijing would enjoy at least a fig leaf of rule-of-law to protect against charges of censorship. There's even a precedent: In 1998, authorities "realised" that the so-called China-China-Foreign strategy (a precursor of the VIE) used to funnel foreign investment into China Unicom violated the spirit of the foreign investment ban for telecoms. Beijing strong-armed the foreign investors into walking away with compensation paid by the hapless Unicom.

Indeed, Beijing probably once thought it would be able to repeat that strategy if the foreign-invested Internet sector got out of hand. To some, both inside and outside of China, it seemed like the perfect solution - allow the law to be bent in the name of economic development, with a built-in option to clamp down later. If anything, this constant threat ought to have made Sina even more pliant. Arguably it has, to a certain extent.

But now the Party won't or can't shut down Weibo. The real reason for all the worried official commentary about microblogging is that Beijing has reached a disturbing realisation: While the authorities obsessed over controlling the supply of Internet services, they lost sight of the demand. That demand for the service Weibo provides has made it so popular that Beijing must fear a backlash if ever the service were cut off. Hence all the talk about "regulating" Weibo but no talk about the simplest and most clearly legal means of ending the nuisance.

The problem is that in this instance, the rule of the party's law discouraging Internet investment would undermine the growth on which the party relies for legitimacy. Beijing needs businesses like Sina, whether it wants them or not. Having admitted this to itself more than a decade ago, Beijing finds it's too late to change its mind now.

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