Game Over in China?

You can't stop progress. China is destined to learn that lesson the hard way, after its government's decision Tuesday to ban the opening of new Internet cafes in the world's most populous nation this year.

Keep in mind that the Web-connected bars haven't exactly been a growth industry. The number of cafes has clocked in at around 113,000 in each of the past few years. New locations have simply replaced establishments that have either failed outright or been shut down by a government worried about censorship lapses, Internet addiction, and the delinquency of minors.

In a developing nation where less than 10% of the population has regular online connectivity at home, Internet cafes are a quick fix for the citizenry's appetite for communication, information, and gaming.

Anatomy of an Internet cafe
Who exactly is going into these tech-friendly bars? According to the Ministry of Culture, more than two-thirds of the patrons are between 18 and 30 years old and 90% are male, with more than two-thirds of them coming in to play computer games.

Those games have become big businesses to some of China's most popular stocks, like Shanda Interactive (Nasdaq: SNDA  ) , NetEase (Nasdaq: NTES  ) , and The9 (Nasdaq: NCTY  ) . Fantasy role-playing games are conducive to the Internet cafe climate, where players can socialize as they take part in the same game. A game of NetEase's Fantasy Westward Journey has had more than 1.3 million gamers living out their virtual lives simultaneously. The9's licensed Chinese version of Blizzard's World of Warcraft has followed in the footsteps of the Western hemisphere's growing "Warcrack" addiction.

Other companies like CDC (Nasdaq: CHINA  ) are trying to crack into the upper echelon of online gaming, but it's a competitive sector, and the Internet-cafe crackdown will likely hurt smaller players trying to get in the game.

If you shutter it, they will still come
Can China afford to silence the Web when its booming economic growth -- running at a 10% clip or better over the past few years -- has blossomed under somewhat friendly terms with its more open-minded foreign trading partners?

It's one thing to rewrite history and deny search engines like Baidu.com (Nasdaq: BIDU  ) or Google (Nasdaq: GOOG  ) the ability to show Chinese Internet users what really happened at Tiananmen Square in 1989. Taking down an entire leisure sector that employs, entertains, and empowers the masses would be both unlikely and ill-advised.

Excess can be dangerous, especially in a hungry country that is quickly transforming into a land of plenty. When you see folks lining up for blocks to snag a copy of an IPO prospectus, or criminal activity picking up at Internet bars after all-night gaming sprees, the appropriate instinct is to curb users' enthusiasm.

China has tried. Last week's tumble in Shanghai's stock exchange coincided with the government's move to raise margin requirements and cool off the speculative fervor. Now local Internet cafes are coming under political fire.

No one is comparing Chinese stocks or multiplayer role-playing games to moonshine -- well, I'm not, anyway -- but recent restrictive measures are about as likely to work as U.S. prohibition did in the 1920s.

You can make investors jump through a few more hoops, but as long as corporate fundamentals remain strong, good money will eventually chase good earnings growth. You can make it tougher to spend hours at an Internet cafe, but a prospering economy will only speed the online connectivity adoption rate in more secure home-based settings.

Even if there's more than a natural seasonal lull behind the recent slowdown in Web-based activity among China's top website destination, logic and evolution don't come with reverse buttons.

Like China in a bull shop
China is trying to cool down hot trends, but its efforts are a lot like laying a mountain of cheese puffs in the path of a freight train. You'll get a lot of crunchy noise and powdery dust, but the powerful locomotive will still get through.

China's growth story is too strong for investors to ignore. Our Stock Advisor and Rule Breakers newsletters have made multiple Chinese stock recommendations over the past few years. Even Motley Fool Hidden Gems got in on the fun, with its selection of online travel-booking specialist Ctrip.com (Nasdaq: CTRP  ) .

A popular American protest song once lamented that they were tearing down trees to build parking lots. I don't think we'll ever hear a Chinese folk song go on about tearing down Internet cafes or IPO prospectuses for the sake of erecting mountains of cheese puffs. Then again, if it did happen, it would probably be a hit.

And even bad lyrics can't get in the way of a hit record.

Baidu, NetEase, and Shanda have all been recommended to Rule Breakers subscribers. Ctrip is a Motley Fool Hidden Gems newsletter pick. Pick a newsletter -- any newsletter -- and the free 30-day trial subscription is on us.

Longtime Fool contributor Rick Munarriz is a fan of China's growth story -- and cheese puffs -- but he does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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