China Tightening Internet Reins

The Chinese government announced new regulations Sunday intended to tighten control of news reported over the Internet, according to a report from IDG News. Chinese news sites will be encouraged to report on progress on economic and social programs, and there are now fines for reporting false or distorted information.

According to a July survey conducted by the China Internet Network Information Center, 79.3% of the country's 103 million Internet users read news online. Only email is more popular.

The question here is whether the regulations -- and authorities' interpretation of them -- will severely constrict the financial and strategic imperatives of news purveyors. Frankly speaking, the idea of governmental authorities seeking to restrict the activities of the press on a medium so vast as the Web seems fairly unrealistic, particularly in a country so large as China. But for companies such as Sohu.com (Nasdaq: SOHU  ) and Motley Fool Stock Advisor pick Sina (Nasdaq: SINA  ) , which run China's most popular Web news sites, the potential effect becomes even more difficult to quantify.

The larger and more visited the site, the more closely China's government will likely monitor its content. For example, the government recently strong-armed the popular Chinese version of Yahoo! (Nasdaq: YHOO  ) into giving up a dissident who had reported on "state secrets" on Yahoo!'s news site.

Investors should realize that it's currently almost impossible to gauge the eventual scope of the new regulations. The market's response to the potential restrictions was muted, but there's no way to tell how much the Chinese government will seek to control or curtail these companies' activities.

It's not unreasonable to guess that the government many not do anything at all. Sina, Sohu, and Yahoo! have already been functioning within China's regulatory realm and will likely require little adjustment. Still, investors should keep their eyes open going forward. More restrictions on content could lead to drops in readership, which in turn could hurt advertising rates.

Let's take a look at the numbers here. Sina is trading for 30.3 times expected 2005 earnings (news and all). For the next five years, analysts expect the company to compound earnings by 28% a year (about 2.5 times faster than the S&P 500). Provided that kind of growth can continue, this portal company is not premium-priced. Personally, I hope recent regulations don't change things too much; they look pretty good as they are.

Further China-related foolishness:

Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Clickhereto see The Motley Fool's disclosure policy.


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