Why I'll Never Invest in These Chinese Stocks

Can we give it up for Google (Nasdaq: GOOG  ) ? The search engine battles for some fundamental democratic principles that the entire world should enjoy. And even when fighting censorship may not serve its business in the short term, its actions to rebuff the Chinese government represent why I would invest in Google over Baidu (Nasdaq: BIDU  ) , SINA (Nasdaq: SINA  ) , or Renren (Nasdaq: RENN  ) any day of the ---- (whoops, that should read "week," but unfortunately that is just one example of a word that China filters out).

A little background
Google recently put up a warning when Chinese users search for terms that usually lead to error messages like "This webpage is not available" or "The connection was reset." Google says these errors are not on its side of things, which makes government censorship the most likely culprit. So now, flagged search terms can signify to users just what terms are being censored (try it here) -- something the Chinese government probably doesn't appreciate. Google is also warning users when "state-sponsored attacks" may be compromising your account or computer.

In 2010, Google announced it wouldn't follow China's censorship policies and moved its search site to Hong Kong. Google now has a 17% share of search revenue versus the 36% it had in 2009, and compared with Baidu's current 78% share, according to Analysis International.

Meanwhile, SINA's Weibo microblogging service recently failed to return searches for "Shanghai Composite" because the Shanghai Composite Index dropped 64.89 points, which unfortunately matched the date of the June 4, 1989, Tiananmen Square protest. This is after the government suspended commenting functions on Weibo for 72 hours in March, following rumors of a coup in Beijing.

Additionally, microblog users across China are being required to use their real names. As Fool Rick Munarriz writes, Weibo has set up a point system to reward those who tie their accounts to mobile phone numbers and ID cards, while discrediting those who spread untrue information or personal attacks. This is one issue that Google agrees on, unfortunately, as it requires real names for its Google+ social network.

Blah, blah, Bill of Rights, blah
But Google isn't responsible for championing freedom of speech and information! It's responsible for earning a high return on investment to eventually return to me, the shareholder! Sure, and it will, with or without China.

With its current decision to ignore government regulations, Google still has 17% of search revenue. Google's Android smartphone market share has grown from 34% to 68% in 2011 alone. China isn't lost just because Google doesn't play by the government's rules.

In fact, Google is building tremendous brand value through its decisions. Google is cementing itself in the minds of the Chinese, and the world, as the uncensored source of information. Additionally, if censorship falls, Google can claim its share of credit for a more open world -- and profit from the increased information that a more open world releases.

Remember the Arab Spring? Beyond attempting to institute fundamental reforms, the revolutions demonstrated the power of social networks like Facebook and Twitter. And Facebook benefited, as it saw higher user growth in the region during those first three months of 2011. The number of Facebook users in Bahrain grew 15% compared with 6% the year prior; the number of Egyptian users grew 29% versus 12% the year prior; and the number of Tunisian users grew 17% versus 10% the year prior. While openness is good for everyday life, it's also good for companies that profit off collecting, organizing, and distributing that information.

Absolute power
These Chinese companies will always be under the thumb of the government's whims, which has proved to be an inconvenience to their users, and potentially to their stockholders. According to the Financial Times, an Internet cleansing campaign called "spring breeze" has resulted in more than 1,000 arrests, 200,000 deleted online messages, and closures of some Internet companies. Think of the gaming segment of Renren, which made up 45% of its 2010 revenue, being shut down because of too much "harmful" chatter between players. The effect would be even worse for Sohu.com (Nasdaq: SOHU  ) , which makes more than 55% of revenue from gaming.

With liberty and Google for all
Google, while not donning an official uniform to play, can still hit home runs. And while the umpire yells at the other Chinese tech companies for not playing by the rules, Google can steal home.

Feeling patriotic? Google isn't the only American company taking on the world. To learn about a few homegrown companies capitalizing on the some key emerging markets, take a look at our free report: "3 American Companies Set to Dominate the World." It's available for only a limited time, so claim your free copy today!

Fool contributor Dan Newman holds no position in any of the above companies. Join the Chinese government in following him on Twitter,@TMFHelloNewman. The Motley Fool owns shares of Facebook, Baidu, and Google. Motley Fool newsletter services have recommended buying shares of Sohu.com, Google, SINA, and Baidu. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 06, 2012, at 11:22 PM, boobasingh wrote:

    NO one force to invest in Chinese company.

    Why NOT invest in Indian Companies or Japanese companies?

    If you don't like Chinese company you can away invest in Indian companies and we are waiting for you money.

  • Report this Comment On June 07, 2012, at 11:05 AM, DITZELIU wrote:

    YOU DON'T INVEST IN CHINESE COMPANIES, THAT DOESNOT MEAN CHINESE COMPANIES ARE NOT WORTHY TO INVEST.

    HOW MUCH DO YOU KNOW CHINESE GOVERNMENT WHEN YOU ARE MAKE A JUDGEMENT ON SOMETHING, YOU SHOULD KNOW BETTER!

  • Report this Comment On June 07, 2012, at 2:03 PM, BabyBeluga2 wrote:

    To date, user data shows tremendous Internet growth continues in China. No doubt Chinese censorship, which has a 1000-year history, will evolve with the new technology. Smart investors might well own Google as well as Chinese Internet companies if they watch the data and ignore the political rhetoric.

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