Alibaba-Yahoo Fight Highlights Threat to China Internet Control

Warning to Beijing: Foreign capital is threatening to pry loose grip on the Internet in China.

Such, at least, was the argument advanced by researchers from China's top think tank in an essay published Monday.

“The combination of capital and the Internet is a mighty controlling power. The Internet is a special industry–once it is controlled by foreign capital, the impact could be severe,” Jing Linbo and Wang Xuefeng of the Chinese Academy of Social Sciences wrote in the Study Times, a publication of the Communist Party School. “So far the issue of control has not been given sufficient attention.”

Exhibit number one, according to Mssrs. Jing and Wang: the recent dispute between Yahoo and Alibaba Group over the ownership of online-payments unit Alipay.

Yahoo, a major shareholder in Alibaba, said in a regulatory filing in May that Alibaba transferred ownership of Alipay to a company owned by Alibaba Chief Executive Jack Ma without seeking board approval or notifying the U.S. company. Alibaba has said the transfer was made necessary by a new central bank rule forbidding foreign ownership of online payments company and that it had been carried out transparently.

In an interview with the editor of Chinese business magazine Caixin, Alibaba founder Jack Ma defended the new ownership rule on security grounds.

The essay comes with a number of notable Chinese Internet companies having recently listed in the U.S., including video site Youku and Facebook-like social network Renren.

“If we judge by the indicator that a foreign control of over 20% stake is relatively controlled, and over 50% is majority-owned, then most Chinese Internet companies that are listed offshore are controlled by international capital,” the authors wrote. “International capital thus controls our Internet industry.”

They also said the combination of capital and the Internet will have an impact on politics and the government, adding that China should strengthen supervision not only over a company's capital structure but also its business operations, including its dealings with related parties.

While the Chinese Academy of Social Sciences is an influential government organization, it is unclear how much support the views have among government regulators. Publication in Study Times, however, means that the Communist Party does not object to making the views known to a wider audience.