Yesterday, I decided to write a Take on a news story about Yahoo! (NASDAQ:YHOO) being called to task by the media watchdog group Reporters Without Borders for providing detailed information to Chinese authorities that led to the arrest of a journalist on charges of "leaking state secrets." About 600 words into the article, I realized I couldn't do it.
Well, not without a whole lot of extra soul-searching, which made me a day late. (Thank goodness for our Foolish editors, who have so much patience!) I finally came to the following conclusion: For all the enthusiasm I may sometimes have about the vast economic potential in China, morally and ethically I have a hard time accepting authoritarian regimes with a lack of interest in personal liberties and a long history of human rights violations.
True, China has been evolving toward a market-based economy. However, as Fool contributor S.J. Caplan pointed out in a recent commentary, there's a lot that investors need to think about before investing in companies based in China or planning expansions there.
China still functions in a very different way from what most of us are accustomed to. And we can't force it not to, or pretend that it isn't that way, however much it has been changing. At times, this fact will put some companies we deal with in difficult positions, and it may shed a new and sometimes awful light on what these companies are willing to do to retain favor with China's government.
That's a serious risk that every investor should be prepared for. Take a look at the regulatory filings by some of the companies that plan to do a lot of business in China. Many times, they come right out and mention the government's heavy hand in their risk factors. (For a good example of such a disclaimer, check out Motley Fool Stock Advisor pick eBay's (NASDAQ:EBAY) Form 10-K discussing its EachNet subsidiary.)
We've seen other examples of the risks inherent in doing business in this kind of cultural environment. The threat of the addictive nature of online video games led the Chinese government to make a law limiting gamers to only three consecutive hours online per day, which could affect companies such as Motley Fool Rule Breakers picks Shanda (NASDAQ:SNDA) and NetEase (NASDAQ:NTES). New regulations about horoscopes in that country also made things tough for Sina (NASDAQ:SINA) not long ago.
In addition, Microsoft's (NASDAQ:MSFT) MSN Spaces in China has been editing out content that included words like "democracy" and "freedom" in blog titles, which recently made waves in the blogosphere.
Meanwhile, the Yahoo! story underlines how a company's dealings overseas could outrage and alienate its customers all over the world. Logically, I can make the argument that Yahoo! has to follow the laws of the country. Ethically, I simply can't say I like the idea that it became part of a government's curtailment of freedom of speech.
So this Take is no longer as much about Yahoo! as it is about the hard decisions that every investor needs to make about any country operating in China. I'm not here to argue with my many very smart colleagues who have made stocks like Shanda and NetEase newsletter picks. I can understand why those companies are gearing up to be Rule Breakers. But are those stocks for me? Given what I consider to be the risks inherent in China's political system and my own personal beliefs, I would have to say no.
For more on similar themes, see the following Foolish content:
- Is eBay dead in China?
- The Yahoo! Dynasty
- A Fool says to think China Inc.
Shanda and NetEase are Motley Fool Rule Breakers picks. Sina and eBay are Motley Fool Stock Advisor recommendations.
Alyce Lomax does not own shares of any of the companies mentioned.
