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Reportedly, the Chinese government will allow social media companies such as Facebook (FB - Analyst Report), and Twitter, and other foreign websites such as that of The New York Times (NYT - Analyst Report) to operate within the newly-developed Shanghai Free Trade Zone. Therefore, people within this 17 square mile area will be able to access these websites, which remain banned in other parts of mainland China.

According to South China Morning Post, the Chinese government is also looking for bids from foreign telecom firms to provide Internet services in the region. This will directly bring foreign companies in confrontation with China’s three largest telecommunications companies China Mobile Limited (CHL - Snapshot Report)), China Unicom and China Telecom.

Facebook and Twitter were banned in mainland China in 2009, while The New York Times website was blocked last year. The Chinese government also blocked access to Google’s YouTube in 2009. Facing prolonged censorship, Google finally decided to leave mainland China in Mar 2010.

The lifting of the ban within the free trade zone is a part of the economic and financial reforms that the Chinese government is experimenting with. The move is a strategic ploy to attract foreign investment in the region.

Undoubtedly China is a big market and the huge Internet population (513 million) of the country means big business for all the social media companies. Moreover, the ever increasing tech savvy Internet community is a blessing in disguise for these companies.

However, besides imposing significant restrictions on online search and other social-networking activities, the Chinese government has also imposed a number of regulations related to direct advertising in China, which is the major revenue source for these companies.

Also, the operations of Facebook, Twitter and any other social media company, which enters the free trade zone, will be restricted within a very small area with a population of only 5 million. We believe that this restriction will act as a major headwind for companies such as Facebook, as it will not be able to attract new subscribers and advertisers.

Moreover, the unpredictable approach of the Chinese authorities toward foreign Internet service providers and social media companies is a major concern. Although the free trade zone is a positive move, it will be preposterous to think that the Chinese government will follow a liberal policy towards social-networking activities, which have been otherwise blamed for instigating anti-government feelings among the general public.

In such a scenario, it will be interesting to see whether Facebook, Twitter or any other foreign company ventures into the free trade zone area. 

Currently, Facebook has a Zacks Rank #2 (Buy).

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