US Investors Tacitly Approve of China’s Censorship

China Commission highlights American finance and people involved with Baidu.
US Investors Tacitly Approve of China’s Censorship
Rebecca Fannin, author of 'Silicon Dragon' and a columnist for Forbes, testified June 30 before the U.S.-China Economic and Security Review Commission, on the Internet and China's dominate search-engine company, Baidu. (Gary Feuerberg/The Epoch Times)
1/3/2011
Updated:
1/3/2011

American capital and venture investors in search of big profits tolerate Baidu’s aggressive censorship.

WASHINGTON—A year ago in January 2010, Google reversed itself in its operations in mainland China, and said it would no longer censor customers’ searches in accordance with the requirements of an Internet search-engine company operating on the mainland. In contrast to Google—always a reluctant censor—Google’s chief competitor in China, Chinese-language Internet search provider Baidu Inc., has aligned itself closely with the regime’s censorship rules and has received commendation for its cooperation with the regime’s policies.

While Google’s policy to cease censoring its users received much media coverage, the media has given scant attention to Baidu’s aggressive censorship policy, and the fact that Baidu’s beginnings and continual financial support and operations involve significant American finances and management.

We may think of the Internet rivalry as an American-based company, Google, pitted against a Chinese-based company, Baidu, but that conceptualization would be overstating their differences. The U.S.-China Economic and Security Review Commission (USCC) made a case study of Baidu in its 316-page Report to Congress, the 2010 annual report, released Nov. 19, 2010.

The 2010 annual report displays a pie chart, revealing substantial holdings by American investors and firms. This information was not secret, of course. With the aid of public sources, the commission’s report highlighted the nexus between American finance and Baidu Inc.

American stockholders own a significant portion of the company. U.S. companies Marsico Capital Management; FMR LLC (Fidelity Investments); T. Rowe Price; Joho Capital LLC; Morgan Stanley; and a firm based in Edinburgh, Scotland, Baillie Gifford & Co., altogether own 31.4 percent. Baidu cofounder and CEO Robin Yanhong Li owns 31.9 percent. This information is based on filings with the U.S. Securities and Exchange Commission.

Moreover, Baidu turned to American investors and American firms for much of its startup capital.
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Two of five of Baidu’s board of directors are American: Gregory Penner and William Decker. Penner, 39, is a general partner of Madrone Capital Partners and director of Wal-Mart Stores Inc. and sits on the 2010 Wal-Mart Board of Directors. He is the son-in-law of Rob Walton (son of Wal-Mart founder Sam Walton). William Decker, 63, is a retired partner of PriceWaterhouseCoopers, according to Reuters. Penner and Decker have been on the Baidu board since 2004 and 2005, respectively.

The U.S.-China Economic and Security Review Commission is mandated by Congress to report “on the national security implications of the bilateral trade and economic relationship between the United States and [China].”

The commission’s annual report, Chapter 5, “China and the Internet,” Section 1, “China’s Domestic Internet Censorship Activities,” relied primarily on the written and oral testimony of two expert witnesses, Rebecca MacKinnon and Rebecca Fannin, at a panel discussion held June 30, 2010.

<a href="https://www.theepochtimes.com/assets/uploads/2015/07/FanninJun30_10+070M_medium.jpg"><img src="https://www.theepochtimes.com/assets/uploads/2015/07/FanninJun30_10+070M_medium.jpg" alt="Rebecca Fannin, author of 'Silicon Dragon' and a columnist for Forbes, testified June 30 before the U.S.-China Economic and Security Review Commission, on the Internet and China's dominate search-engine company, Baidu. (Gary Feuerberg/The Epoch Times)" title="Rebecca Fannin, author of 'Silicon Dragon' and a columnist for Forbes, testified June 30 before the U.S.-China Economic and Security Review Commission, on the Internet and China's dominate search-engine company, Baidu. (Gary Feuerberg/The Epoch Times)" width="320" class="size-medium wp-image-118189"/></a>
Rebecca Fannin, author of 'Silicon Dragon' and a columnist for Forbes, testified June 30 before the U.S.-China Economic and Security Review Commission, on the Internet and China's dominate search-engine company, Baidu. (Gary Feuerberg/The Epoch Times)
Fannin’s book, Silicon Dragon, was used by the commission as a source for the list the report provides of American venture capital firms that helped launch Baidu. “The initial investors were Peninsula Capital and Integrity Partners, which put $1.2 million in the startup in 1999,” said Fannin. Later in 2004, Google invested $5 million for a 2.6 percent stake, but sold its shares in 2006 (for $60 million) and began competing directly with Baidu, Fannin said.

Fannin said that Baidu was set up like a typical Chinese startup in the early days of the “Internet era,” as a wholly owned foreign enterprise (WOFE), a structure that enabled “venture investors to put capital (usually U.S. dollars) into a Chinese company.”

Baidu Inc. (BIDU) began trading on the NASDAQ stock exchange in August 2005, and is backed by blue chip investors including Morgan Stanley, says the Register. In 2007, Baidu became the first Chinese company to be included in the NASDAQ-100 Index.

Baidu Inc. did exceptionally well financially during last year when Google retreated from the world’s largest Internet market of 420 million Internet users. The NASDAQ quotes BIDU stock value at $96.53 on Dec. 31, 2010. It was only $41.00 at the start of 2010.

Third-quarter net income was $156.4 million, a 112 percent increase from the corresponding period in 2009. Third-quarter revenue of $337.2 million was way up from $187.3 million in third quarter 2009, according to the Economic Times. As Google retreats to Hong Kong, Baidu has gained more market share of search-engine revenue in China, now at 72.8 percent in the third quarter compared to 71 percent for the second quarter, according to Bloomberg.

Baidu has become the most visited website in China (and the sixth-most visited on the Internet), according to Alexa, a website that tracks web traffic.

Internet Censorship, Chinese Style

“Baidu, China’s leading search-engine company, has a long history of being the most proactive and restrictive online censor in the search arena,” says the China Digital Times (CDT), cited in the report.

An anonymous Baidu employee leaked a set of detailed documents, which revealed a department within Baidu that monitors and censors “both search-engine results and user-generated content,” said MacKinnon, from the New America Foundation.
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The documents include “operating instructions, and specific lists of topics and words to be censored and blocked, [and] guidelines of how to search information which needs to be banned,” says the CDT, April 30, 2009.

<a href="https://www.theepochtimes.com/assets/uploads/2015/07/MacKinnonJun30_10+068M_medium.jpg"><img src="https://www.theepochtimes.com/assets/uploads/2015/07/MacKinnonJun30_10+068M_medium.jpg" alt="Rebecca MacKinnon, Schwartz senior fellow, New America Foundation, testified June 30, 2010, before the U.S.-China Economic and Security Review Commission on how Chinese authorities use the Internet to both extend their control and enhance their legitimacy (Gary Feuerberg/The Epoch Times)" title="Rebecca MacKinnon, Schwartz senior fellow, New America Foundation, testified June 30, 2010, before the U.S.-China Economic and Security Review Commission on how Chinese authorities use the Internet to both extend their control and enhance their legitimacy (Gary Feuerberg/The Epoch Times)" width="320" class="size-medium wp-image-118190"/></a>
Rebecca MacKinnon, Schwartz senior fellow, New America Foundation, testified June 30, 2010, before the U.S.-China Economic and Security Review Commission on how Chinese authorities use the Internet to both extend their control and enhance their legitimacy (Gary Feuerberg/The Epoch Times)
MacKinnon quoted an editor of Sina.com, Chen Tong, who complained of the rigmarole he has to abide by to censor for the China regime, including “24-7 policing; constant coordination between the editorial department and the ‘monitoring department’; daily meetings to discuss the latest government orders listing new topics and sensitive keywords that must be monitored or deleted depending on the level of sensitivity, [and the work of] constantly reporting problematic content and bringing to the attention of company censors.”

Standard keywords banned are related to Falun Gong, Tibet independence, and the Tiananmen Massacre. Additionally, information related to human rights, democracy, riots, jailed dissidents, AIDS, and migrants are candidates for ban.

Both Fannin and MacKinnon said that all Internet companies operating in China, whether domestic or foreign, are legally liable for everything appearing on their search-engines. They are even liable for what their users may discuss or organize.

“All Chinese Internet companies of any size have entire departments of employees whose job is to police users and censor content around the clock,” said MacKinnon.

Essentially, the regime has “outsourced” to the private sector much of the work of the censorship and surveillance, said MacKinnon. Companies will lose their business licenses and be shut down if they do not self-censor to the satisfaction of the authorities.

Compared to other Internet companies working in China, Baidu’s search-engine censorship was found to be “more extensive and through,” said MacKinnon. MacKinnon conducted a study in 2008 of 15 Chinese blog-hosting services, and found Baidu to be at the top of the list—China’s third most aggressive blog censor.

The commission’s report suggests that Baidu complies “begrudgingly.” Baidu’s product designer complained about the censorship requirements. Certainly, from strictly a business perspective, it makes little sense to block your users.

American Investment Community Looks the Other Way

Baidu and the other Internet companies are an essential part of China’s control of free expression. MacKinnon attended a conference in China in 2009 where Baidu CEO Robin Li and 19 other Chinese Internet company executives were awarded the “China Internet Self-Discipline Award,” which is “China’s annual censorship award for companies,” explained MacKinnon.

In her June 30 testimony, MacKinnon said, “At a recent event convened by Bo Xilai, the Communist Party secretary of Chongqing and a rising star in China’s next generation of leaders, Robin Li was one of 24 Internet executives who sang revolutionary songs and pledged to promote ‘red culture.’”

Because much of the costs of censorship fall on the private sector, the American investment community is complicit in this activity to the extent that it “has been so far willing to fund Chinese innovation in censorship technologies and systems without complaint or objection,” said MacKinnon at the hearing.

The final statement by the commissioners of USCC says, “While many Americans praise Google for its decision to discontinue censorship of its search results in China, other Americans have continued to subsidize and profit from censorship practices in China.”