China Creates New Internet Overseer

By LORETTA CHAO

BEIJING—China announced a potentially powerful new agency to supervise the Internet, underscoring the evolving regulatory environment in the country just as interest in Chinese Web companies is soaring among global investors.

A string of public offerings is in the pipeline. The debut of social-networking site operator Renren Inc. Wednesday on the New York Stock Exchange raised $743.4 million, even though the company posted a loss for 2010.

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Baidu's website is seen on a laptop screen in a December photo.

Analysts say it is unclear whether the new office will streamline the bureaucracy or add another layer.

The new State Internet Information Office will be headed by officials from at least three agencies that regulate different aspects of the Internet, the state-run Xinhua news agency reported Wednesday. These include the State Council Information Office, which is responsible for content; the Ministry of Industry and Information Technology, which regulates the technology and telecommunications sectors, and the Ministry of Public Security, the law-enforcement body.

The new agency will "direct, coordinate and supervise online content management and handle administrative approval of businesses related to online news reporting," Xinhua said.

Web companies in China face daunting regulatory obstacles that reflect the government's conflicted approach to the Internet, which presents both a huge economic opportunity and, in a country where speech critical of the government is tightly controlled, a political threat.

All Internet companies need an Internet content provider license from MIIT, while online video websites need a separate license from the State Administration of Radio, Film and Television and online game companies need approvals from both the General Administration of Press and Publication and the Ministry of Culture.

Sometimes, orders from the various agencies clash, such as in 2009 when conflicting orders from GAPP and the Ministry of Culture caused the costly suspension of the Chinese version of Activision Blizzard Inc.'s popular massive-multiplayer online game "World of Warcraft," operated by Netease.com Inc. Both agencies claimed supervisory roles over online games.

All companies must filter their own content to eliminate so-called unhealthy content—ranging from pornography and violence to politically sensitive material—and censorship orders pour in from all levels of government.

Enforcement of censorship rules, and technical measures to limit access to some websites, were stepped up early this year after uprisings in the Middle East and North Africa, organized partly through social-networking sites, spooked Chinese authorities.

Adding to the risk is the corporate structure that Chinese Internet companies have adopted in order to list in overseas markets. Key Internet licenses in China can be issued only to local companies, so overseas-listed companies such as Web portal Sina Corp. and search firm Baidu Inc. are actually holding companies based outside of China that own the Chinese companies holding the licenses needed to operate their businesses.

This structure, which has been used in China for more than a decade, may be disrupted if officials decide it conflicts with the law.

Chinese officials didn't immediately respond to requests for comment, and the SCIO said it would release more details Thursday.

China has more than 450 million Internet users, more than any other nation, with online video, e-commerce websites and Twitter-like microblogging services taking off in popularity in recent years.

Investor interest in Chinese Web companies both old and new remains high in part because some of the older generation of Chinese Internet companies to go public—such as Tencent Holdings Ltd. and Nasdaq-listed Baidu—are now among the largest Internet companies in the world by market capitalization, though with far less revenue than comparable U.S. Internet companies.

"The sheer commercial scale of the Internet now" with such high valuations "invites intervention from ambitious agencies keen to validate their own importance in the sector," said Duncan Clark, chairman of Beijing-based consulting firm BDA China Ltd.

—Helen Qucontributed to this article.

Write to Loretta Chao at loretta.chao@wsj.com

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