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China to lift ban on Facebook, others in free trade zone: Report

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China has made a momentous decision to liberalize internet access within the planned Shanghai free-trade zone to websites seen as politically sensitive including Facebook, Twitter and the New York Times, the South China Morning Post reported on Tuesday.

"In order to welcome foreign companies to invest and to let foreigners live and work happily in the free-trade zone, we must think about how we can make them feel at home," said one of the government sources who declined to be named due to the sensitive nature of the topic.

"If they can't get onto Facebook or read The New York Times, they may naturally wonder how special the free-trade zone is compared with the rest of China," the source said.

(Read more: Why the run in Facebook has just started)

The Hong Kong newspaper, quoting government sources on the condition of anonymity, said the free-trade zone, which is intended as a testing ground for new policies, will also welcome bids from foreign telecommunications companies for licenses to provide internet services.

Hong-Kong listed shares of China Mobile, China Unicom and China Telecom – China's three leading state-owned telecom players – fell between 0.7 and 2.1 percent on the news Tuesday.

The imminent establishment of a free trade zone covering 29 square kilometers of eastern Shanghai is regarded as an important step forward in China's economic liberalization. Successful initiatives will ultimately be rolled out nationwide, but likely after several years, say analysts.

Shaun Rein, managing director of China Market Research Group said lifting a ban on internet access to websites such as Twitter and Facebook is crucial for Chinese companies that are looking to establish a presence globally.

(Read more: Facebook shares hit record intraday high)

"It's clear that the lack of internet access is hurting Chinese companies from a competitive standpoint. They don't have a presence on Facebook, Twitter; they don't know how to launch marketing campaigns around the world," Rein said. Facebook and Twitter have been banned on the mainland since 2009.

Increasing competition in the telecom space will also be positive for the entire country, Rein said. "It will push Chinese telcos to become more market savvy. They haven't had competition to push them to innovation and new services. Internet access is very slow here on mobile phones and in the home."

(Read more: Facebook joins the $100 billion club)

"I expect a lot of telecoms companies to invest, it's a good [opportunity to penetrate] the China market," he added.

—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H

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