September 2000
Federal Reserve Bank of Dallas

The Internet in China

The first e-mail from China to the outside world was sent in 1987. Since then, the Internet has seen explosive growth in China, especially in the past three years. In June 2000, the number of Internet users reached 16.9 million, up from only 0.6 million in 1997.

Projections on future growth vary from 33 million users by 2003 to surpassing the United States in 2005 with the most Internet users in the world. However, compared with the current penetration rate of 42 percent in the United States, the penetration rate of the Internet in China will still remain much lower.

Nowadays, a typical Internet user in China is young, male, single, well educated and relatively wealthy.

The Internet in China has been built on the back of the government-sponsored information highway and the fast-growing telecommunication market. The number of fixed telephone lines is approaching 130 million, rising from less than 10 million a decade ago. Although 70 percent of the Internet users presently use dial-up connections based on fixed telephone lines, there is tremendous potential in wireless and cable TV networks.

The government has been heavily involved in building a dozen backbone networks in the past decade. Several of them, including CHINANET, run by the state-owned China Telecom, are licensed to sell Internet facilities to other Internet service providers—companies similar to America Online. Because China Telecom controls the majority of the Internet infrastructure, CHINANET is the de facto monopoly supplier of Internet services.

Nevertheless, the market is playing an increasingly important role. Currently, private sector involvement mainly concentrates on the Internet content providers, companies similar to Amazon.com. It costs as little as $45 to register and use a domain name for two years. By the end of June there were nearly 100,000 domain names under the top domain .cn and about 28,000 websites in China.

Although China's current policies on foreign Internet investment are still ambiguous, an estimated $150 million of foreign capital has already flown into China's Internet business. China has committed under the U.S.–China WTO agreement up to 30 percent foreign equity holding upon China's accession to the WTO, 49 percent after one year and 50 percent after two years.

Compared with the United States, China faces additional hurdles to e-commerce, such as the lack of a nation-wide credit card system. Online transactions last year accounted for less than 0.01 percent of total retail sales in China. However, the e-commerce turnover is estimated to reach over $1 billion in two years from no more than $40 million. Profitwise, the outlook is much dimmer. Of the 637 Internet companies engaging in e-commerce in Beijing's Haidian District—the Silicon Valley of China—only 39 turned a profit during the first half of 2000. This is probably not so surprising to people familiar with the experience of e-tailers in the United States

In addition, policy uncertainty clouds the future of e-commerce in China. Companies now face a complex and evolving regulatory environment concerning issues such as the approval procedure for companies to issue stocks and the required registration of encryption software with the government. Taxation of the Internet business is also overshadowing the prospect of an e-commerce boom.

The Internet's expansion has significant social and political implications in China too. Though nervous about the Internet's capability of spreading different views and information, the government has reconciled itself to the reality that it is impossible for anyone to control the Internet completely. At the same time, despite the government's attempt to restrict access and blockade "sensitive" material online, information is more readily available to the general public today than ever before. The international connection is still limited but is expanding very fast.

In conclusion, despite heavy government involvement, the market is playing an increasingly crucial role in the development of the Internet in China. The Internet is bringing inevitable changes to the economy and the society as a whole.

—Dong Fu

About In Depth This article is based on a presentation by Dong Fu, Research Department, Federal Reserve Bank of Dallas. The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System.