Mr. Hu, Tear Down This Wall!

Over two thousand years ago, China began to build its Great Wall in order to keep nomadic tribes and marauding armies from crossing its borders. In the last few decades, China has built another protective barrier, a 'Great Firewall,' to keep socially disruptive web content from reaching its citizens.

American companies have long acquiesced to this censorship charade in order to have access to China's booming online market. Last week, Google changed its mind, shutting down its regulated site on the mainland and redirecting people to its uncensored Hong Kong portal. This laudable act of defiance indicates that China's bustling marketplace is straining its authoritarian political regime. We expect the latter to yield.

With a population of over 1.3 billion, GDP growth of some 8.9% in 2009, and some $2.4 trillion in official reserves, China already is a major global force to be reckoned with. Having recently surpassed Japan as the world's second largest economy and Germany as the world's largest exporter, China is fast approaching superpower status.

According to the Wall Street Journal, China already is home to more Internet users than any other country. This vast market promises to expand exponentially as wealth increases and education spreads. As of the fourth quarter of 2009, Google held some 36% of the search engine market in China, second only to the China-based Baidu Inc., with 58%. In 2004, Google bought a 2.6% interest in Baidu for $5 million, and incredibly sold its interest at a profit of more than $50 million two years later.

The fact that the Chinese market offers such investment potential to Google highlights the cost of incurring Beijing's wrath. The reason for Google's stand may lie with co-founder Sergey Brin, who migrated to the U.S. from the Soviet Union as a child. He was initially tempted by the huge returns in the Chinese market and rationalized the censorship regime thusly: "We felt that by participating there, and making our services more available, even if not to the 100 percent that we ideally would like, that it will be better for Chinese web users, because ultimately they would get more information, though not quite all of it."  It was only after four years of patient compliance and a major Chinese intelligence attack on dissidents using Google networks that Mr. Brin finally decided that his conscience could take no more.

It's important to realize that Google wasn't exactly self-immolating by making this departure. The search engine remains the world's dominant player, with a loyal following of hundreds of millions of fee-paying customers and advertisers. According to a Jefferies' analyst, Youssef Squali, cited in the Journal article, China accounts for only one to two percent of Google's net revenue anyway. This move was simply a stark reminder to Beijing that it needs the global market more than vice versa, and that the path to 'social harmony' is not through increasing authority but increasing liberty. In that way, it was very healthy and praiseworthy.

Google's stand does not change our fundamental view of the Chinese market. We believe that the Chinese government has a tremendous incentive to heed the call for continued liberalization, in order to bridge a growing gap between the newly rich minority and the still-impoverished majority. It is important to recognize that Beijing has not threatened Google's operations in Hong Kong, though it surely has the muscle to do so. The leadership knows any move back toward Maoist governance would surely bring civil unrest. They clearly understand the implicit deal they have struck with the Chinese people and foreign investors: the CPC remains in power as long as growth continues apace.

Though Google's departure has brought the media spotlight on China's Great Firewall, Western reporters may fail to grasp that it is crumbling. The question is not whether China will continue to grow, but how quickly; not whether the Chinese leadership will reform, but how gracefully. The trend in China is clearly toward liberty, even if not at the pace Google and other Western multinationals demand. While it is right for them to challenge the CPC to continue moving forward, perhaps they should also be asking: what is the trend here at home?

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