Facebook recently celebrated its 200 millionth active user. Interestingly, according to Facebook, only 300,000 of those users are in China – a small figure considering the fact that China is the most populous country in the world and home to 300 million Internet users.

Western social networks have watched as their Chinese counterparts gained momentum over the last several years. Below, Inside Facebook’s Jessica Lee provides an introductory overview of the social networking scene in China, shedding light on the obvious question: Why hasn’t Facebook grown more in China?

1. China’s Anonymous Internet Culture

The Bulletin Board System (BBS) has had a huge influence in shaping how China’s Internet users interact with each other on the Web. BBS’s are traditional discussion forums that are run by individuals, companies, and government organizations on a variety of topics ranging from shopping to current affairs. In a ReadWriteWeb post last year on the BBS phenomenon in China, registered BBS accounts were said to have reached 3 billion: users typically have multiple accounts, most of which are anonymous.

80 percent of Chinese sites still administer their own BBS’s today, bringing in a total of 1.6 billion page views and 10 million comments each day. Examples of BBS’s can be found on the People’s Daily, a government-run daily newspaper, Sina, the leading infotainment web portal in China, and the blogs of Chinese celebrities such as actress Jinglei Xu. The BBS community is characterized by its topic-centered and anonymous nature – two traits that have set an expectation around how Internet users in China feel comfortable sharing information with each other, challenging Facebook’s goal to be a platform that’s focused on real identities (not anonymous nicknames).

This preference for anonymity makes sense given harsh Internet censorship in China that holds users accountable for the content they publish, especially when it comes to political opinions that may not be in line with the government’s. In this sense, establishing a real online identity does seem to be a luxury of sorts that’s more feasible in free market economies like the US.

2. China’s “Guanxi” Business Culture

Local Chinese companies are market leaders in the social networking space because they know how to navigate the entrepreneurial landscape in China. China is still at a stage of development in which entrepreneurs are more often copying ideas than innovating on their own – Intellectual Property laws remain weak.

Moreover, while many Chinese social networking sites claim to be open platforms, they don’t offer a level playing field when it comes to building an open ecosystem for the developer community. The concept of guanxi, referring to the social and political connections that make doing business in China easier for certain influential individuals or parties, is at work. Without knowing the right contacts, developers may not get the visibility that they would normally expect in an open platform system.

For Facebook and its application developers, this means that the innovation process in general, and in particular application development, is highly competitive and vulnerable to copycat developers who can replicate ideas in a cheaper, faster manner.

The following table briefly describes four of the leading social networking sites in China, using data from TechCrunch and Alexa, a Web intelligence site:

3. China’s Mature Virtual Goods Economy

Chinese social networking sites are surprisingly lucrative, generating the majority of their revenues from virtual goods as opposed to online advertising. In a recent market analysis on Chinese social networks, TechCrunch points out that Chinese spending on online ads is expected to be $1.7 billion in 2009 (four percent of total online ad spending). The US, by contrast, is expected to spend 15 times this amount. Relying less on online ads, Chinese sites earn the bulk of their money through virtual goods.

Targeting these small, but high-volume user payments has proven to be a resilient revenue strategy, given the cut in online ad spending companies are facing in today’s economy. +8*, an Internet consultancy in China, Japan, and Korea, predicts that while the US market for virtual goods is approximately $200 million, China’s online gaming market is around $3 billion. Although this market is both attractive and tempting, and Facebook has recently launched its own virtual currency system, the company may not be ready and may never be willing to position itself as a commercial marketplace, given its people-focused mission.

4. Different Social Applications & Games Popular in China

Social applications and games designed to give users a “virtual” experience outside of their daily reality may be more likely to succeed in China. Data from the Chinese app-tracking site AppLeap indicates that out of the top five performing apps on Xiaonei (as measured by application value in RMB), most of them pertain to the outdoors, either growing gardens or maintaining ranches.

1. 开心农场 (Happy Farm): 4.3 million RMB
2. 开心农民 (Happy Farmer): 1.4 million RMB
3. 阳光牧场 (Sunny Ranch): 0.8 million RMB

The concept behind these apps is similar: users maintain their own personal gardens, growing flowers, fruits, and vegetables and accumulating virtual currency along the way. Users can also visit their friends’ gardens and steal produce from them.

When asked why farming apps are so popular and highly capitalized in China, one young professional in Nanjing told Inside Facebook, “In China, we don’t grow up with spacious areas like many of our peers in the US, so there’s a greater desire for us to want to own our own land and maintain our own gardens even if they’re only virtual. In a virtual world, you can do things you’re not allowed to do in everyday life, like stealing carrots from your friends!”

The leading Facebook apps are deeply expressive and relational (Living Social, Causes, Super Wall), whereas the top apps on Chinese social networking sites provide users with virtual spaces that they don’t have real-world access to.

Above: Buying seeds to plant in my virtual garden on Kaixin

5. China’s Entertainment-focused Youth

The 300 million Internet users in China are young. TechCrunch also reports that 67% are under 29 years old, and 35% are teenagers. Another report by Nanjing Marketing Group notes that in 2008, China surpassed the United States in total number of Internet users.

Contrary to popular thought, China’s Internet users don’t just come from the rising urban middle class: in 2008, 87 million were from rural areas. In terms of gender, the male-to-female ratio in urban areas is representative of the general urban population; however, it’s disproportionately higher in rural areas. In addition, the number of Internet users with a college education fell in 2008. This, combined with the popularity of Internet cafes, encourages an Internet culture of entertainment (e.g., online gaming and chatting).

Internet cafes have taken off in China not only because many Internet users don’t have access to computers with high-speed broadband connections, but also because it’s a space where users feel a sense of camaraderie with friends – and strangers. In addition, Internet cafes are affordable and free from parental supervision. With such a young entertainment-oriented group, Facebook’s social utility, which prides itself on connecting people and allowing them to share in honest, open ways, may not be the first thing on the minds of Chinese youth.

Conclusion

With these facts in mind, it’s not surprising that US-based Internet giants like Facebook face significant challenges penetrating the Chinese market. As Facebook eyes China, it must consider a whole set of questions, including: how to meet the demands of young Internet users in China who are entertainment focused and value anonymity and virtual escape; and how to monetize its platform alongside a transitioning command economy without compromising its identity as a social utility that gives people the tools to bring their real personalities and lives with them online.