3 Myths You Need to Know About Chinese Censorship in 2013

On Dec. 28, China's government signed new censorship laws that, at first glance, may spell terror for your investments. But that's only what news outlets may have you believe.

In reality, the law mostly makes official what companies and the government have been practicing all along. To put it another way, the law doesn't bring any new changes to how censorship is carried out in China. So before you pull back on your investments, here's a quick rundown of China's real censorship policies.

Myth 1: This law will make censorship much worse
Just as The New York Times and The Wall Street Journal report, China's new laws do require Internet users to provide their real names to service providers. In turn, Internet companies now bear greater responsibility for deleting and reporting illegal activity online.

However, the move is not really an "attack" on freedom of speech. To a great extent, almost every Internet company censors and reports users already. For example, both SINA (SINA) and Baidu (BIDU 0.62%) have algorithms that wipe the Internet of illegal postings and employ up to 1,000 "censors" to patrol the website. So all this law really does is make official what companies have done already. Not much has changed.

Myth 2: Censorship will crush your companies, your investments
The news also portrays China's micro-blogging communities such as SINA Weibo ("Twitter of China") or hi.baidu.com (Baidu's blogging service) in danger of dying slowly or shutting down. But neither are likely to happen -- at least, not because of censorship.

Think about it: All companies, big and small, must comply with these new regulations. And the bigger companies have an advantage at managing these new rules at relatively minimal costs. The only way that SINA and Baidu's social efforts are in danger is if a better product comes along, like Tencent's WeChat, and makes micro-blogging obsolete. But that's another story.

So far, it seems censorship has done little to scare investor confidence in these companies. That shouldn't be a surprise. Many Chinese investors probably recognized the governmental risk a long time ago, and most have probably concluded that the potential, long-term returns outweighed the risks. It seems like investors still believe that.

On the day of China's regulatory announcement, its biggest tech names barely moved. Even SINA -- which the censorship law should hurt most because critics often use Weibo to voice their opinions -- saw a 2.23% increase in its share price. Moreover, social networking site Renren (RENN), the "Facebook of China," which depends so much on users sharing information, should have been hit badly (censorship could limit how Renren users interact with each other -- see more below). Instead, the company's shares increased by 0.30%.

Myth 3: Beijing doesn't like government criticism
Apparently, Chinese officials are telling the truth: They are not out to limit government criticism or exposes on corruption.

In a recent Harvard study, researchers discovered that most social media websites permit scathing criticisms of the government. Even more interesting, the likelihood that a posting is removed doesn't increase as the severity of the posting increases. So, a sharp, negative comment is no more likely to get removed than a tepid piece of criticism. (They pulled data from 1,382 social media sites in the first half of 2011, including SINA and hi.baidu.com)

What Beijing really wants is to stop collective action. In practice, that means blocking "sensitive" words on social media that may incite people to organize rallies and protests. For example, mentions of artist and political dissident Ai Weiwei were highly censored back in 2011 when he began to gain international exposure.

Of course, if Beijing is out to cut social ties, while social networks Renren and SINA are trying to build them up, then it's clear who is going to win out. The government's efforts to make each user an isolated voice in a large crowd may make these services less "sticky," especially since networks are most robust when users have consistent back-and-forth interactions online. Although Renren and SINA may continue to grow into the future, you can be sure that Beijing is just a step away from limiting their and your profits.

One thing you need to do this year
Government censorship is always a risk when investing in Chinese technology. But you shouldn't feel daunted. The censorship law hasn't introduced any new measures that should surprise you or change your investment thesis. For now, the Chinese tech stocks mentioned are off to a positive New Year. So instead of worrying about what Beijing may or may not do, stay invested and focused on why you've invested in the first place.