The timing may be right for Facebook to enter China next year, analyst predicts

Key Points
  • The beginning of Chinese President Xi Jinping's second term should help Facebook enter China, because Google renewed its license during the second term of Xi's predecessor, Mizuho researchers said in a Monday report.
  • Facebook declined to comment.
  • The social media company also recently hired a Beijing-based government relations executive, the report said.
  • The researchers expect Facebook's venture into China will "initially be localized and connect only Chinese users."
Facebook Chief Executive Mark Zuckerberg speaks with Chinese President Xi Jinping.
Pool | Getty Images

Conditions may soon be right for Facebook to break into the Chinese market, and Mark Zuckerberg's social media giant is already taking strategic steps to do so, Mizuho said Monday.

"During our recent China trip, our meetings with various industry contacts indicated that FB could have a realistic opportunity for entering China next year," James Lee, managing director, Americas research, and Wei Fang, vice president, research, said in a report.

Facebook declined to comment. Shares traded about 1 percent higher midday Tuesday, outperforming the broader U.S. stock market's mild gains.

The report pointed out that Beijing tends to lessen its media scrutiny during an administration's second term, and Facebook may have "an opening" after Chinese President Xi Jinping begins his second five-year term in November.

"For example, Google successfully renewed its ICP license [for operating in China] during the second term of the prior President Hu Jintao," the Mizuho report said. "We believe the recent approvals of MNC internet companies such as LinkedIn and Airbnb are signs China is more open to internet companies that can help Chinese companies gain global recognition through advertising or facilitate economic growth through travel."

Facebook hit 2 billion monthly active users in the second quarter, but it has been blocked in mainland China for at least 8 years. Meanwhile, internet penetration in China is growing and reached 53.2 percent in 2016, with 731 million users, according to a January report from the China Internet Network Information Center.

The China Internet Information Center and Chinese Ministry of Industry and Information Technology did not respond to emailed requests for comment Tuesday evening Beijing time.

Internet's growing role in Chinese media consumption

Source: Zenith Optimedia, Hillhouse Capital and Kleiner Perkins

In the last few months, Facebook has taken more steps in apparent preparation for operations in China.

The company recently hired a Beijing-based government relations executive whose experience includes helping LinkedIn China secure a license in the country, the Mizuho analysts pointed out.

Although the report didn't name a specific individual, William Shuai is listed on LinkedIn as "Senior Manager of Government Relations" for Facebook in Beijing, since September. The profile shows Shuai was director of government relations for LinkedIn China for more than three years, and government relations manager at Chinese internet giant Baidu for nearly three years before that.

Shuai did not immediately respond to a LinkedIn message sent Tuesday evening Beijing time. Facebook said the company doesn't comment on personnel.

The company is also looking for an office space in Shanghai, The New York Times reported earlier this month, citing two people familiar with the matter. The news followed Facebook's failure to establish a location in Beijing when it received a three-month permit to do so in late 2015.

"We have long said that we are interested in China, and are spending time understanding and learning more about the country in different ways," a Facebook spokesperson said in a statement to CNBC that repeated the comment to the Times.

The social media company already generates more than $1 billion a year, or about 4 percent of total revenues, from Chinese advertisers, the Mizuho researchers estimated, citing checks with advertising agencies.

"The Chinese government has been pushing for globalization of Chinese brands so what FB does for Chinese advertisers is also strategic in order to get the license into China," the report said.

To be sure, it is unclear whether Facebook can crack the massive mainland Chinese market. Facebook CEO Mark Zuckerberg has unsuccessfully courted Beijing for years, while local social media platforms have even disrupted each other within China.

Facebook's foray into China may also look different from how it operates in the West.

"We believe the business will initially be localized and connect only Chinese users. As for the products, we believe that either Instagram or VR are the most likely," the report said.

— CNBC's Michael Bloom contributed to this report.

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