Chinese Internet giants such as Tencent and Baidu are looking to cyber-savvy but cash-poor rural youth in China's smaller cities as the next frontier to maintain their explosive growth.

Compared with Japan and South Korea, two of Asia's most wired countries with more than 70 percent Internet penetration, China has a modest national penetration rate of 30 percent, despite its status as the world's biggest Internet market with 420 million users.

Internet use is particularly low, around 20 to 40 percent, in the country's populous but relatively low-income central and western provinces such as Henan, Sichuan and Hubei, where analysts see the biggest chances for huge growth.

Companies such as Tencent, Baidu and Perfect World, whose products use less bandwidth and cater to the simpler tastes of users in smaller markets, could be best placed to cash in on the spread of Internet access to those areas, analysts said.

Official data show about 30 percent of China's current Internet users, or about 126 million, live in rural areas, or about half the penetration rates for big cities including Shanghai.

In the third quarter, China's Internet economy was worth 41.4 billion yuan (US$6.2 billion), a third of which was e-commerce, data from iResearch shows.

Lower incomes aside, another major factor limiting Internet growth in the countryside is less developed telecommunications, with broadband relatively scarce.

That could start to change, however, as China promotes a "triple play" project starting in 2013, aimed at delivering TV, telephone and Internet networks over sophisticated broadband networks to reach more homes faster.

"Once the infrastructure is in place, we will see competition in broadband heat up," said Mirae Asset analyst Eric Wen.

Niki Xie, 22, a migrant to Shanghai from interior Hubei province, is typical of the youth that China's Internet titans would like to tap.

Having recently lost her sales job, she sat at an Internet bar on a recent afternoon, idling away her time by playing Tian Long Ba Bu, a hit game from Changyou, for up to eight hours a day.

"I have nothing to do, so I spend my time online and playing my boyfriend's character," said Xie.

"I hope to own my own desktop computer someday, that way I don't have to keep coming here and I can play for as long as I want."

Xu, a 25-year-old from Shandong province, also typifies the trend. He spends up to two hours a day clicking furiously to swat flies on his friend's virtual farm in a simple game on Tencent Holdings' highly popular QQ portal, which also includes China's most popular instant messaging platform.

"In the near term, this is very much a Tencent story," said Yoon of Nomura. "When you take on a new batch of unsophisticated users, the first thing they do is to sign up for QQ instant messaging and so we think that will be the first gateway."

Other online game companies such as Perfect World are trying to adapt their offerings to suit simpler tastes in the rural market. The company recently released 2D and 2.5D versions of its popular 3D games targeting smaller markets, Yoon said.

Game operators aren't the only group looking to the rural masses for growth.

Taobao, a unit of China's largest e-commerce firm Alibaba Group and operator of China's largest service targeting sales to consumers, also sees huge growth in smaller cities and rural areas. The firm said half its transactions now come from such markets, with the fastest growth in central and west China.

(China Daily November 16, 2010)