Smirch engine

Baidu: The knives are out for Baidu. China’s online search giant has been pilloried in a series of reports by the state-run China Central Television (CCTV), accusing it of shoddy business practices and not policing its message boards for “slanderous” remarks. The allegations may be a product of professional envy, government conspiracy, or just consumer-minded investigative journalism. But, they serve to remind investors of the risk inherent in China’s dotcom superstars.

Baidu is growing rapidly — all the more so since US rival Google skipped town over censorship concerns. Revenues in the last quarter grew 78 per cent year-on-year. The suggestion that Baidu staff helped users peddle fake airline tickets and pharmaceuticals on its pages is serious, but not unsurprising for a business growing so quickly. Baidu had already launched a campaign to root out false sellers. The big question is whether CCTV was following government orders.

Given China’s fractious relationship with the internet and free speech, it’s possible — but unlikely. If there is an ulterior motive behind the reports, it may have more to do with CCTV’s ambitions for its own fledgling online search product. Still, if consumer outrage mounts, there is a risk the government will wade in to regulate, or worse. Tensions over the web are already high, as the state struggles to control thriving “microblogs” such as Sina’s Weibo. The site broke news of China’s fatal train crash on July 23, and was a major forum for the discontent that followed. Politicians may choose to clamp down first, and ask questions later.

Moreover, Baidu has an Achilles’ heel. Like all Chinese dotcoms with foreign investors, it has sidestepped restrictions on foreign ownership through an unusual structure that gives shareholders contractual rights over, rather than direct ownership of, its licences. These structures haven’t been tested, but the government could yet declare them unlawful, as the company admits in its filings. The share price doesn’t suggest much fear. While Baidu’s shares fell 9 per cent after the CCTV reports, they are up more than 40 per cent in 2011, so far. But, CCTV’s assault should remind Baidu investors their super returns come with more than just a little political uncertainty.