Free China Movement Update

Vol.3, No.7 Apr 7, 2000

Editors’ Note: Big corporations want to do business with mainland China without realizing the danger they are facing because there is no rule of law in the people’s republic of China. Microsoft’s experience should raise a warning to all CEOs who are lobbying for unconditional PNTR to PRC: Appeasing PRC would put themselves to a risky situation when there would be no leverage left for USA to press for rule of law, human rights and freedom in mainland China. Pro-democracy activists should learn from the story in Peru that nobody should pursue his/her own interest over the interest of the people. We believe the new type of coup in Peru won’t be successful if there is strong international response like this:" We will rally Peru's influential business community by showing it that its interests as well lie in democracy."

1.In China, a Different Kind of 'Trust' Problem

2.In Peru, a New Model for a Coup?

3.Did China Miss the IPO Boat?

In China, a Different Kind of 'Trust' Problem
Suspicion: Beijing needs Bill, but doesn't love him

By Leslie Pappas and Melinda Liu
Newsweek International, April 17, 2000

Last January, when Chinese officials began to enforce a rule to make software companies register encryption products, the information-technology industry worried. But nobody worried more than Microsoft, which was gearing up to launch Windows 2000 in China. The Chinese regulations suggested that Win2K might be banned. But just days before the March 20 launch China suddenly announced it would soften the rules. Microsoft got the green light.

China's relationship with Microsoft is emblematic of its relationship with America—sweet and sour. Mainland authorities know they need Microsoft if they hope to thrive in the information age. Yet they fear becoming overly dependent on the company. So the government has urged the development of alternatives, like Red Flag Linux. Unlike Windows, Linux is an open-source operating system—which means its programming isn't hidden. China (and developers around the world) like that.

For the moment, China's market still smiles on Gates. Over 90 percent of individual users run Windows. But since many can't afford the software, high penetration is possible only because many Chinese buy pirated software. "The biggest competition for us and any other software company in China is piracy," says Michael Rawding, Microsoft's regional director for greater China. "It dwarfs any other competitor." Anti-Microsoft sentiment even holds the company responsible for the piracy of its own products. Newspaper commentator Fang Xingdong claims that the combined retail price of Windows 98 and Office 97 is twice the per capita income in China.

That type of thinking is causing more headaches for Microsoft. Rumors of Trojan horses embedded in Windows software are rampant in newspapers and online bulletin boards. These code fragments have hidden functions; some believe they make it possible to access private information. "Backdoors in Windows 95 and Windows 98... send back user's information to a huge database in Microsoft headquarters," claimed the state-run Workers' Daily newspaper recently. (Microsoft denies the charge.)

In the end, though, such sentiments don't seem to outweigh China's fundamental need for the latest technology. With the U.S. set to vote on trade relations with China in late May—a measure important to China's entry into the World Trade Organization—there's too much to lose, for China and Microsoft. According to Rawding, the Chinese government has shown "a huge amount of interest in Windows 2000. It works, people like it and that's why they're buying it." China, it seems, wants to open up without relinquishing control—a tough act to follow. Microsoft, more than anyone, ought to know.

With Barbara Koh in Beijing

© 2000 Newsweek, Inc.

In Peru, a New Model for a Coup?

By Elliott Abrams
Wednesday, April 12, 2000; Page A27

Are coups still possible in Latin America? That is the issue today in Lima--and in Washington.

Peru's presidential campaign, which ended in Sunday's elections, was denounced for unfairness by all independent observers. The joint delegation of the Carter Center and the National Democratic Institute referred to violence and slander against candidates, government manipulation of the media and use of state resources to promote President Fujimori's candidacy in concluding that "irreparable damage has been done to the integrity of the election process." "The conditions for a fair election have not been established," their March 24 report stated. Observers for the OAS and the European Union agreed with this assessment. Still the opposition pressed on, hopeful that Peruvians would go to the polls and vote their minds.

Peruvians did vote on Sunday, but the election is being stolen. Early returns showed that a second round would be required--a runoff between Fujimori and his top challenger, Alejandro Toledo--and the State Department acknowledged in Monday's press briefing that "no single candidate won an absolute majority and there will be a runoff." But each day more Fujimori votes have been "discovered" so that Fujimori can claim he won the 50 percent needed for a first-round victory.

No independent observer believes he won 50 percent. Rafael Roncagliolo, director of the most respected monitoring organization, Transparencia, said election observers had discovered ballots preprinted with a vote for Fujimori; Toledo's name simply did not appear on others. No one in Peru believes it was an accident that power was cut to Transparencia's headquarters over the weekend and that its computers were infected with a virus. Meanwhile, the head of the OAS monitoring mission, former Guatemalan foreign minister Eduardo Stein, said the delays and changing vote counts "do not have a reasonable explanation."

In a sense they do: The explanation is fraud. Fujimori has decided to stay in power no matter what the Peruvian people or the international community say. Perhaps his taste for power is too great after 10 years as president; perhaps he believes, as Pinochet did and as many dictators do, that he is the only alternative to chaos; perhaps he fears the prosecutions for corruption and human rights abuses that probably would follow leaving office.

Whatever the explanation, the test facing the U.S. government is what we do about it. Old-fashioned coups are passe in Latin America: When a general rings the presidential palace with tanks and strides up its steps in uniform, his Latin neighbors and Washington join in denouncing him.

But what about coups without generals? In 1992, Fujimori pulled off his famous autogolpe, or self-coup, dismissing Congress and ruling for a while as an autocrat. Pressure forced him to pledge free elections. What he is doing now is worse: using the power and purse of the state to perpetuate himself in power permanently. In the past two years he has seized television stations from their owners, compromised press freedom, employed the intelligence service as his personal political tool, forced out independent members of the Supreme Court and withdrawn Peru from the Inter-American Court of Justice.

Either Fujimori will be stopped and a free and fair second round of elections held in Peru or we will have approved a new model for Latin autocracy: Just leave the tanks and uniforms at home, and a coup is still possible.

It is unlikely that Peruvians, led by Toledo, will accept being the test tube for the new model; they are protesting all over Peru. Where will we be a few days from now when marches are broken up by tear gas and truncheons, and Toledo and his top supporters are in Fujimori's prisons?

The time for Washington to act is today. We should make it clear--at the "highest level"--that if Fujimori steals this election and declares himself president for five more years, he will be a pariah. We will take the lead in organizing Latin and European democracies to isolate him and his government, block Peru's access to international financial institutions and end bilateral and multilateral cooperation. We will rally Peru's influential business community by showing it that its interests as well lie in democracy. We will reach out to the Peruvian military to persuade it to back democracy.

These are the warnings we should give Fujimori today. And if he goes through with his threats and steals the election, we should go through with ours. With strong international support, Peru will find its way back to democracy quickly enough. But if we abandon Peru, the new model of coups without generals will have gained a Latin American foothold we will long regret.

The writer was assistant secretary of state for inter-American affairs in the Reagan administration. He is an adviser to Baruch Ivcher, the Lima TV station owner whose citizenship was canceled and whose station was seized in 1997.

© 2000 The Washington Post Company

Did China Miss the IPO Boat? (int'l edition)
Now, the rush to Net startups is slowing

The timing stank: For months, the executives of had pleaded with stubborn Beijing regulators to let their Chinese Internet portal raise capital in the U.S. by listing on Nasdaq. But the officials, determined to maintain their grip on the fledgling Internet industry, refused to budge. So Sina could only sit by helplessly as foreign investors shoveled money into rivals like Hong Kong's Chinadotcom Corp. and Pacific Century CyberWorks Ltd., which used their huge market values to snare deals and expand their franchises.

In late March, Beijing finally gave Sina the green light--and top executives immediately embarked on an overseas road show to promote the listing and raise some $70 million. ''It's very encouraging after all the travails and trials,'' beamed Joseph Tzeng, managing director of Cleveland's Crystal Internet Venture Fund, which had helped supply Sina with seed capital.

But it may all be a case of too little, too late for Sina and numerous other Chinese dot-coms that have been waiting for a turn at the great Net money trough. Not only has the massive sell-off of U.S. technology stocks suddenly dampened market enthusiasm for Asian startups. Investors have also just gotten disturbing news from Beijing. As part of a deal with Sina, China's Information Industry Ministry imposed severe restrictions on overseas listings. Net companies must exclude their mainland Internet operations from any corporate entity they float abroad.

Behind the move: Beijing wants to keep its hands on strategic industries. ''There is a lot of money to be made here,'' says Matt McGarvey of International Data Corp. in Hong Kong, and Beijing leaders ''don't want to lose it'' to foreigners. Besides, recent venture capital conferences such as one in Beijing, which was jammed with financiers, seemed proof positive that investors are so infatuated with the Chinese Net that Beijing can call the rules as it sees fit.

But if the current stampede out of tech stocks proves to be the end of the Net bubble, Beijing may come to rue its high-handed behavior. Many Asian dot-coms face more daunting challenges in living up to their hype than do many of the U.S. highfliers now getting pummeled on Nasdaq. Whereas companies such as already have established important franchises that produce revenue, most of Asia's hot Net players have barely launched a business. Now, the brazen meddling by Beijing has reminded investors that China-linked Net outfits carry the added burden of considerable political risk.

APRIL SWOON. Thus, a reality check is well under way. The 13% drop that took place between Mar. 24 and Mar. 31 in Hong Kong's new Growth Enterprise Market (GEM)--where many Chinese dot-coms are listed--was steeper than Nasdaq's swoon (chart). In the first two trading days of April, when the markets were absorbing the news of Microsoft Corp.'s legal setbacks, the GEM plunged a further 25%.

China plays have been among the hardest hit in Asia. Chinadotcom, backed by America Online Inc. and by Beijing's official Xinhua news agency was a resounding success when it listed on Nasdaq last year. But it saw its stock drop by 40% in three days--and by more than 60% since mid-February. The damage has spread to Hong Kong's Internet ventures, which need to succeed in China if they are to live up to investors' expectations. Pacific Century CyberWorks, the Net flagship of Richard Li that recently made a successful bid for Cable & Wireless HKT Ltd., has lost some $17 billion in market capitalization since mid-February. Ltd., the bare-bones portal launched by Richard's billionaire dad, Li Ka-shing, also is 50% off its high since going public last month. Another victim is SuNeVision, a dot-com backed by Hong Kong's wealthy Kwok family. Much more than Nasdaq backlash is at work. The main reason for the retrenchment, says one contemptuous Hong Kong stock analyst, is that many of Greater China's dot-com stars are ''B.S. companies.''

Such sentiment will make life especially hard for initial public offerings from China, where companies must restructure their businesses and leave some prized assets out of the publicly listed vehicles. Consider Sina and, a popular portal run by entrepreneur William Ding that wants to float shares on Nasdaq. They must split themselves into two. The half that foreigners can buy into will be incorporated in a Caribbean tax haven. This entity will own the company's brand, proprietary software, and its content. Its revenue will derive largely from payments from the other half of the company, the Chinese half. This entity must remain in Chinese hands and keep the portal's licenses for operating a mainland Web site. The optimists hope none of this will matter. In its prospectus and road shows organized by Morgan Stanley Dean Witter, for example, Sina stresses that this bizarre structure isn't a problem. The U.S. unit, after all, will own most of the key intellectual property and get a share of the Chinese firm's earnings.

But to investors who are already fuzzy on how the promise of millions of Chinese Net users will actually pay off, it's a recipe for greater confusion. What's more, opaque policymaking makes it hard to predict Beijing's next move. Bureaucrats could do plenty more to affect the offshore-listed units, perhaps by putting new limits on the content and software Chinese Net firms can buy abroad. The rules do not provide ''as clear a corporate structure as most investors would like,'' says Credit Suisse First Boston analyst Jay Chang.

NO-BRAINER. Don't expect China Net fever to disappear completely. Plenty of investors still seem willing to take the plunge. Just four months ago, some Shanghai entrepreneurs with Harvard University MBAs were able to raise $43 million from major U.S. venture capital firms and other investors for a stake in, a second-tier portal that lags far behind Sina and Netease. The key selling point was simple, says eTang founder Haisong Tang: ''China is big.''

Yes, China is still big. And bulls point out there is a good chance that the environment could soon dramatically improve. As part of its deal with Washington to join the World Trade Organization, Beijing has promised to allow direct foreign investment in the Net sector, so rules that now hamper overseas listings may disappear. ''With time, the regulations will be more clear, and there will be proper ownership structures,'' says Howard Chu, CEO of portal If market upheaval continues, the question is whether investors will have the stamina to wait for the turn.

By Bruce Einhorn in Hong Kong

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