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Chinese digital sector booms as foreign investors pile in

China’s digital industry has pulled in nearly half a billion dollars in a week after two of the country’s leading online players received substantial overseas investment.

Oak Pacific Interactive, owner of university-based social network Xiaonei, secured funding of $430m, led by Japanese telecoms firm Softbank. The funding gives the investors a 35% share, valuing the company at almost US$1.23bn.

The news followed the announcement that, which only weeks ago was reportedly fighting for its life after falling foul of the authorities, had pulled in fourth-round funding of $57m early this week. Much of that investment comes from US-based venture capitalists.

Oak Pacific also owns entertainment portal and video-sharing site UUme, though Xiaonei, which it acquired in October 2006, is expected to benefit from the bulk of the funding as it tries to turn itself into the ‘Facebook of China'. Social networks of the Western type are in their infancy in China and several operators, including Facebook itself, are keen to take the lead.

Several other sites in China's social network space, among them regional player, are also tipped for new investment in the coming weeks.

The big question surrounding these sites is whether they can start making money to justify their valuations. According to Claus Mortensen, principal at analyst IDC, there is "plenty of potential" in the sector, "and the immediate promise is for online advertising." He points to the expected increase in overall Chinese ad budgets in coming years, as well as the rising proportion of those budgets being spent on digital. However, that could take several years to come to fruition.

Mortensen also pointed out that Western investors had changed tack after companies such as Yahoo! and Google have struggled to make headway in China. Now investors are seeking to be silent minority partners in Chinese businesses. "We've seen that going in as a key partner is difficult," he added.

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