Stocks Suffer as China Debates Real-Name Internet Registration

On Monday, the top Chinese legislature began debating a bill that could require all web users in the country to provide the government with their real identity in order to obtain access to the Internet. Chinese Internet stocks dropped across the board as news made the rounds because of fear that compliance and the lack of anonymity may cause decreased user traffic.

Exactly who does this hurt, and why?

Top Chinese Internet stocks such as SINA Corporation (NASDAQ:SINA), Sohu.com Inc. (NASDAQ:SOHU), Yoku Tudou Inc. (NYSE:YOKU), and Renren Inc. (NYSE:RENN) closed Monday’s session over 1.6 percent lower. The top dog in the Chinese search market, Baidu (NASDAQ:BIDU), also closed the session nearly 2 percent lower.

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All these companies offer online services whose success is measured by the number of users and how active they are. As the nation’s top micro-blogging platform, Sina Corp., perhaps has the most to lose. As a forum of free expression, anonymity has long been a critical component in the success of online communication. Many people will only participate in an online dialogue under the condition of anonymity.

In its 20-F filing last Spring, Sina Corp. expressed concern that the regulation, and particularly forcing compliance in the short-term, could harm the Weibo user experience. The company said:

“If the Chinese government enforces compliance in the near term, such action may severely reduce Weibo user traffic. The implementation of user identity verification has deterred new users from completing their registration on Weibo and a significant portion of those who have provided identity information to us was rejected by the Chinese government database, which means that these users will have limited posting ability in the future and may cause the level of activity of Weibo users to decrease over time.”

Fewer users and less traffic translates directly into less money for a company that is funded primarily through ad revenue…