Two news items over the weekend caught my eye.

First, as reported by Forbes, Yahoo is negotiating the purchase of a 35% stake in Alibaba, a Chinese e-commerce company:

Yahoo! would be gaining one of China’s most coveted Internet partners. Alibaba.com is led by Jack Ma, a onetime English teacher whose unpretentious style and quick wit have made him one of China’s most revered entrepreneurs. Alibaba operates two online business sites--Taobao.com, an online auction site, and Alibaba.com, an online trading site. Both were ranked among the world’s top 40 Web sites on Sunday by Alexa, the Internet monitoring service.

Second, Baidu -- the so-called "Chinese Google" -- executed a spectacular IPO last Friday that was reminiscent of the 1990s internet bubble. The price nearly quintupled on the first day of trading, and it's still rising. Check out this risk factor from Baidu's prospectus:

We may be adversely affected by complexity, uncertainties and changes in PRC regulation of Internet business and companies, including limitations on our ability to own key assets such as our website.

The PRC government extensively regulates the Internet industry including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the Internet industry. These Internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be a violation of applicable laws and regulations. Issues, risks and uncertainties relating to PRC government regulation of the Internet industry include the following:

• We only have contractual control over our websites. We do not own the websites due to the restriction of foreign investment in businesses providing value-added telecommunication services in China, including online information services.
• There are uncertainties relating to the regulation of the Internet business in China, including evolving licensing practices, means that permits, licenses or operations at some of our companies may be subject to challenge. This may disrupt our business, or subject us to sanctions, requirements to increase capital or other conditions or enforcement, or compromise enforceability of related contractual arrangements, or have other harmful effects on us.
• Certain PRC government authorities have stated publicly that they are in the process of promulgating new laws and regulations that will regulate Internet activities. The areas of regulation may include online advertising, online news displaying, online audio-video program broadcasting and the provision of culture-related information over the Internet. Other aspects of our online operations may be regulated in the future. If our operations do not comply with these new regulations at the time they become effective, we could be subject to penalties.

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, Internet businesses in China, including our business.

We used to call that the "Communist Party Risk Factor." In light of recent sabre rattling by Congress, perhaps U.S. companies should include a similar risk factor in all of their offerings.

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