Charles Zhang - CEO, Sohu.com HARDtalk

Welcome to a special edition of HARDtalk from Beijing. When you

think of the Chinese economy, you probably conjure up images of

assembly plants and production lines. Those stereotypes need

updating, because this is Beijing's Silicon Valley. The next chapter of

China's economic growth story is being written here. The Chinese

government is trying to shift the balance of the economy from

manufacturing to services. At the heart of that shift is the Internet.

650 million Chinese citizens use the Internet. The business potential of

the world wide web is vast. The Internet brings with it social,

cultural and political change as well. That is where China's rulers

begin to get nervous. This is the headquarters of

Sohu.com, a provider of Internet services from gaming to video

streaming. My guest today is the entrepreneur Charles Zhang, the boss

of Sohu.com. Is there such a thing as the Internet with Chinese

characteristics? To what extent is the Internet

changing today's Chinese economy? To a large extent. The Internet is

gradually taking over the economy. Taking over? I would say that. How

can you justify that? Say for e-commerce, it is already replacing

the department store. For media, Sohu.com and its portals have made

the newspaper obsolete. We are gradually replacing the television.

People do not watch television, they just watch videos. And for chat

programmes replacing operators, responsible for everybody's

communication. You see all of these areas where the Internet is taking

over. I want to go into some of those areas in more detail. It seems

that is an interesting general point. So many sectors of the

Chinese economy have been dominated by the state, the government.

Everything from mines to heavy industry to the banking sector and a

lot of manufacturing is state owned enterprise. That is not true in the

technology sector. The traditional industry is mixed. There are a lot

of private firms. Even the private sector, if it wants to survive, it

needs to cooperate or deal with the government a lot. Only the Internet

is an exception. Is this important to you? Does that make the Internet

more flexible, more innovative? Definitely. If you look at the

spectrum, for banking sectors it is purely state owned. Then you have

operators and telecoms. There is more competition. Then you have real

estate. You have all of these, restaurants are probably the most

privatised. Most of them are state owned. But the Internet is purely

the closest form of a pure market economy. You make it sound very pure

as though for the first time in China there is an economic sector

which is purely driven by economics. Innovation and excellence. It is not

true. Surely it is true that the government, though it wants to

encourage the Internet, it also wants to maintain close control of

it. There is still a factor of government intervention, even in

your sector. First of all, it is such a new technology area that the

government do not really understand it. Generally speaking, the rules

and what you can do or cannot do are much more relaxed. And also, because

the government admit they do not understand this Internet thing. They

do not say that now. We are often talking censorship, regulation,

talking about a government that insists on maintaining control of

information. You have to acknowledge that. You have to understand that

the government has the intention to make the Internet successful and

improve efficiency. The government is concerned about this new animal,

this new technology. It has destabilising effects on society.

The so-called control is 5% or even less of the topics. Western media

are more concerned, but for people living in China, the Internet, even

from the information point of view, people are not concerned. 95% of

content and activity, the government are eager to see it develop and

prosper rather than control everything. You have to remember

that the government wants to have the Internet developed. It is not

just about content, it is about basic competition. In this country,

if I want to use Google or Facebook or Twitter, it is virtually

impossible. Those companies have not been allowed to play in this

country's marketplace. The companies that thrive here are all Chinese,

growing exponentially. They are not in a truly internationally

competitive marketplace. Since the Internet started and you look at

Microsoft, you name it, American companies are allowed to compete in

China. There is an advantage to being a local company. It does not

come from that. When you have this pure market economy with thousands

of Internet companies, there is real competition. Everybody has to

compete on excellence on innovation on perseverance, resilience. All of

these things. There are thousands of companies. It is like street

fighters. You have Microsoft, Yahoo! Academically they are very strong.

The resume is great. But they are not selected by the market. This

person does not have the entrepreneurial drive or incentive

or percentage of the company. You have a percentage. It is not

selected by the market. There is no incentive large enough. They do not

have the authority. If the system wants to have the coding changed.

The structure of multinationals have a branch and put someone in China,

it does not work. You may have some reasons... The bottom line is this,

Google tried to break into the China market. The reason they withdrew to

Hong Kong is because they felt they were being compromised by the

pressure of government. Essentially, censorship in the China market

place. You said yourself at a conference four years ago, you said

China's voice is lacking because it has no media organisations that can

win international respect. You were implying that you yourself saw a

problem with the way in which the Chinese authorities insist upon

playing a role in media. Google and Facebook, I understand what is

happening. What I am saying is that if I am lecturing to an MBA class, I

am telling them the main reason, 80% of the reason, you are picking up on

20% of the reason. I am presenting a case study on why a multinational

failed in China. Multinationals failed, not because of censorship,

but because of the reason I listed. What do you think about the new

government being led by Xi Jinping? His apparent desire to crackdown on

content the government considers as unhelpful? When he says as he said

not so long ago that his goal is to form a strong Internet army to seize

the ground of the media, it seems to many people around the world that

China has a view of what the technology sector can offer that is

all about furthering the government's national agenda. That

the growth in China is very much still a part of the command economy.

You say that is not true. The technology sector is a pure market

economy. In terms of politically sensitive content, what the

government believe is in destabilising factors. But when we

see the arrest of high-profile bloggers, a whole list of different

offences, stirring up trouble, causing vile social influence, these

can all lead to detention and imprisonment for bloggers and others

using the Internet. Do you worry about that? As the person at the

head of a successful Internet company, what is it doing to the

reputation of the sector in terms of its international perception? I

worry, but when you have a new demonstration of them trying to do

things, historically you always have a period of time where in order to

carry through hard measures you probably need to shut people up. Let

them carry out the plan. But the people being shut up are trying to

use the Internet in a creative way. Isn't the whole point is that it

should not be censored by tens of thousands of government officials in

dark rooms? First of all, it is really a temporary phenomenon. Why

do you think that? Because I am in this market. I feel it. Any change,

I can feel it. Also, in China, there is a saying that you manage in order

to develop. Because the internet is exploding. While it is exploding,

there is a management strategy side by side, along with the explosion or

hypergrowth. Otherwise, authorities worry that it's out of control. So

if you say... If you look at the history, the user base of internet

users in China, the growth from when I returned to China, it's only a few

thousand. Now you have 600 million people on the internet. Then you

have applications of all kinds. Not only media or political issues,

reporting on media, replacing traditional media. Even if you get a

taxi now you have applications. That improves the efficiency of getting a

taxi much more. That's the point. You can do anything! It is making

the Chinese economy so much more efficient, which is why the

government loves the internet. But the government is also suspicious.

One question keeps coming back... Can you have it both ways? The old

phrase from the old socialist system, can you have the internet

with Chinese characteristics? It has been demonstrated. The internet has

achieved thousands of times of growth while still being damaged.

--managed. Its growing successfully. Western media still pays attention

to the small percentage of politically sensitive issues. Other

than that, it is really free territory where you can do a lot of

things and if the government says, OK this is good for internet

development and it doesn't cause a major problem, the government is OK.

For example, when we introduced American TV shows there is a policy

grey area... Hang on, this is interesting. Do you

have to get the censors or any government department to sign off on

the kinds of movies and TV shows from America that you are allowed to

bring into China? No. The TV shows and movies... Not movies, yet. The

TV shows... Let's talk specific. Shows like House of Cards, Saturday

Night Live, the Ellen Show... Breaking Bad, Homeland, you name it.

All of the American shows on cable TV or the free network is in China.

And people can stream them? It's become a trend. The government says,

first of all there are no political issues because these stories are

dramas, about American society. There isn't much chance of them

falling into the 5% of politically sensitive category.

There is. In House of Cards, there is a

well-known character who is a corrupt Chinese businessman. You can

see how relaxed the Chinese government is about video content.

You have never had a conversation about your content? No, they love

it. Things are changing all the time. A final word on this issue of

censorship and content before we move on. There is a very well-known

blogger in China. He has 12 million followers. He upset the authorities,

they arrested him on some charges which seemed to go away, but they

put him on TV in handcuffs saying to the whole of the Chinese nation, the

internet is very dangerous and I support the government's new

controls on internet. I just wonder whether you, with your understanding

of everything the internet can offer China, believe the government is

wrong to take that sort of attitude? As I said, I think it's a temporary

brief period of tight control, so that the new administration can

carry on with its plans. I wouldn't see it as a long-term phenomenon.

You have to be an optimist to believe that. Yes. Something else

that's interesting about the tech sector in China, it's so successful

and growing so fast, it's generating vast waves of new money. You

yourself are said by Forbes magazine to be worth many hundreds of

millions of dollars and there are many tech billionaires or almost

billionaires in this country. Is that healthy, do you think? After

all, we are still in communist China and there are many rich Chinese but

the tech sector is making people unimaginably rich, so quickly. Do

you worry about that? I don't worry. It's good. Not only making all these

entrepreneurs rich but creating a lot of jobs. Improving the

industry's efficiency and competitiveness in the economy. The

internet is the best thing. The society is a hybrid, good things and

bad things. The internet is the best of the best. I come back to this

point about the nature of China. Maybe this is wrong but you were

quoted in the Wall Street Journal a few years ago when you were buying a

superyacht. They said you waited to buy the yacht until you were

convinced you were buying the most luxurious yacht in the country. When

you reach that sort of lifestyle and you are public about it, aren't you

creating problems for yourself? Well, yeah, I do have yachts and

jets. But the new billionaires are buying bigger ones. You have to buy

bigger ones? After a while I realised it isn't life's meaning.

You put it well. I've been speaking to Ai Weiwei, the artist in China.

He is very concerned about the effect of materialism and money on

Chinese society. He says he walks and travels around Beijing and sees

so many people who feel disconnected from the success and power of the

elite and who also have a deadness in their eyes because China has

become so much about defining yourself by money. Do you think

that's true? It is a problem. I think after the cultural revolution,

the traditional Confucianism and Buddhism and Taoism, they are

preserved. But after the cultural revolution the culture was lost. The

country needs to re-establish its value system. Otherwise, more and

more problems. The good thing is again the internet and connecting

China with the world. So the younger generations, they are being

brainwashed by universal values. Brainwashed in a good way? Yes, in a

good way. They watch American movies, listen to American music,

there are all kinds of studies and reports, things going on. Many

multiple channels of access to information... The younger

generation, they understand equality, their own rights, right

and wrong. Many ways to be not brainwashed but I would say

enlightened. Unlike the older generation. Maybe this internet with

Chinese characteristics only has a limited shelf life. Maybe in the

long run it will just be the internet? I believe so. It's

probably only 5% or even 1% of information that in the short term

the government believes has a destabilising effect, then they are

concerned. But on a general level, there's vast amount of activity or

information. The government is really relaxed. A final question

about values. Looking ahead 20-30 years, do you see the internet, the

tech sector, what people like you are doing, as a democratising force

for China? It has been in the last 20 years and it will be. We have to

end there. Charles Zhang, thank you very much

for being on HARDtalk.