China’s Next Potential Moneymaker

The most sought-after initial public offering (IPO) since the arrival of Google Inc. (NASDAQ/GOOG) in August 2004 is in the works, as social networking giant Facebook is expected to file for its IPO this week. With over 800 million users from around the world, including 80% located outside of the United States, Facebook will make investors who are lucky enough to get the stock at the pre-IPO price (yet to be determined) rich. The fact that over 350 million active users access Facebook via mobile devices is impressive.

One of the most important markets for Facebook will be China and India given the fact that the two countries account for a third of the world’s population.

In China, just take a look at the numbers. Imagine that China, which strived for socialism under Mao Zedong during the Cultural Revolution from 1966 to 1976, has now become the epicenter of the Internet world with demand growing at a staggering pace.

The number of Internet users in China is tops in the world, with a whopping 505 million on the Internet at the end of November 2011, according to the China Internet Network Information Center (CNNIC). The number of broadband users stands at around 15.51 million users, up 18.6% year-over-year. There are also over 340 million smartphone users.

In addition, about 58% of Internet users in China roam the Web via their cell phones, according to the State Council Information Office.

These are massive numbers and point to the staggering growth.

But what is impressive is that the Internet penetration rate is still low at 37.7% versus over 70% in the U.S., so there is still ample room to grow.

Facebook knows the massive potential in China and wants to dominate the social networking space there, but there will continue to be restrictions in the communist country. A few years ago, Facebook met government resistance when trying to expand in this country where the government tries to control the media, which sometimes unfortunately includes freedom of speech. The key to achieve success is developing alliances with Chinese companies and then working hand in hand to develop the market. Facebook enlisted Chinese Internet giant Baidu, Inc. (NASDAQ/BIDU) to expand its reach.

In the mid-cap space, a Chinese social networking play is Beijing-China-based Renren Inc. (NYSE/RENN). Renren operates a real-name social networking Internet platform in China with about 137 million activated users as of September 30, 2011. The platform allows users to connect with each other. Services include social networking, online gaming, social commerce, and business social networking.

It will be exciting to see how Facebook does in China; but one thing’s for sure: I expect social networking could be the next big thing if allowed to flourish.

Another area that I feel has tremendous growth opportunities in China is travel, which I discussed in The Super-hot Chinese Sector.