It’s 9 a.m. in China, and nearly 80 million users are logged on to online chat network QQ, most of them on the Chinese mainland. Later today, that number will reach nearly 150 million. In smoky web cafes, office blocks and homes across China, millions of Chinese make QQ China’s dominant online community.

With its cutesy penguin logo, QQ is “like MSN and Facebook rolled into one,” according to Zixue Tai, Chinese internet researcher and author of “The Chinese Internet: Cyberspace and Civil Society.” QQ has grown so spectacularly that it almost resembles a region of Chinain itself, with a population rivalling most provinces. “It’s hard to find anyone in Chinese cities who doesn’t use QQ,” Tai says.

Like most of the Chinese internet, QQ was originally based on a foreign model: “QQ started as a copy of America Online’s messenger program,” Tai says. QQ was launched in 1999 by Tencent, a small company based in the southern Chinese boomtown of Shenzhen. Tencent’s founder, Ma Huateng (马化腾), who goes by the English name Pony Ma, was a recent computing graduate who grew up close to Shenzhen.

QQ’s total user base is now more than 700 million. That’s higher than China’s total online population, estimated to be around 500 million, suggesting that some QQ users have registered several accounts. Eighty-five percent of instant messaging users in China rely on QQ, with just 14 percent turning to Microsoft’s MSN messenger as their main means of staying tuned in, according to the China Internet Network Information Center.

Each user is assigned a unique QQ number, and the fact that Chinese business cards often carry this in place of an email address is testament to the service’s ubiquity. “It’s a source of pride for Chinese people, that we have a home-grown site to rival MSN or Facebook,” explains Tai. QQ’s rise turned Tencent into China’s largest internet company, though its company registration is currently in the Cayman Islands.

With nearly half of its registered users under 25, QQ is changing the social habits of a generation of Chinese. “There’s no question QQ has transformed China’s youth culture,” Tai says. A survey carried out by MTV in 2008 found that China was the only Asian country where young people reported having more online than offline friends.

As millions of Chinese youths migrate from the countryside to cities in search of work, they use QQ to keep in touch with old friends and make new ones. QQ’s search function made it easier to find friends online, enabling its users to reach out to others who share the same interests. Early versions of QQ were set to accept conversation requests from strangers by default. “Users’ privacy concern level is low in China,” researchers atRenminUniversity wrote in a 2008 report. “Users are happy to be connected with strangers in a virtual community.”

A variety of factors have made Chinese youth especially willing to engage in social media. Rural-to-urban migration that separates families, loneliness created by China’s one-child policy and the monotony of China’s mainstream media are all factors, according to Tai. “The popularity of QQ reflects an increasing fragmentation of society,” he says.

Beyond Chat

By the mid-2000s, QQ had trounced its rivals and established itself as the champion of China’s instant-messaging market. The fact that QQ was free to use was a central part of its appeal, but it became a problem for Tencent, which lacked a way of capitalizing on the network’s popularity. QQ’s development since then has essentially been the story of the search for reliable income streams.

Tencent’s first innovation was QQ Zone, a MySpace inspired site which gave users a customizable web page for uploading text, photos and music. Today QQ Zone has over 150 million active users, uploading an average of 60 million photos every day. Users could pay extra to upgrade their QQ zone with different backgrounds and banners. “When I was in high school, I’d spend at least RMB 100 a year on my QQ space,” says Peng Yuan, a university student in Beijing.

Tencent realized that though its users weren’t wealthy, they were willing to pay small amounts for individual online purchases. Today, over 80 percent of Tencent’s revenue comes from value-added services that users pay for using QQ coins (币, Bì) QQ’s virtual currency. Tencent introduced QQ coins in 2002, and the currency has since become the main driver of China’s virtual goods market, valued at about US$5 billion in 2009.

One of the most popular ways for users to spend their QQ coins is to tailor their online identity with Tencent’s avatar design service, QQ Show (秀, Xiù). Based on Cyworld, a South Korean service that enables users to chat online using self-designed avatars, Tencent designed QQ Show as a place for users to “show their online identity,” according to Camellia Yang, an analyst at internet research firm Synegage.

QQ Show’s users start out with a simple cartoon avatar, which they can alter for small payments made with QQ coins. Users can change their avatars’ physical characteristics, such as height and hairstyle, and can also buy clothes and makeup, all of which is visible to other users during chat sessions. There are now 440 million uniquely customized avatars on QQ Zone, according to Synegage. “The QQ Show concept spread through word of mouth, like viral advertising,” Yang says.

Tencent partnered with clothing brands, such as 361 Degrees, a sportswear manufacturer, allowing QQ Show users to buy a purple 361 Degree hoodie, or a pink 361 branded handbag for their avatars. For many teenage users, buying clothes for their avatars is a replacement for buying clothes for themselves “In high school I could easily afford a RMB10 dress for my avatar, but buying one for myself was less affordable,” Peng says.

QQ Show now offers virtual shopping malls packed with Chinese brands, and even virtual car dealerships, where sports cars can be bought from cartoon car salesmen with immaculately drawn side-partings. “It was exciting telling friends that I’d changed my avatar’s clothes, and seeing their reactions,” Peng says.

QQ Show’s success demonstrates the often intimate relationship Chinese youth have with their online personas. In a 2008 survey, twice as many Chinese internet users as Americans said that they lead parallel lives online. More than two-thirds of Chinese surveyed said they felt that they are free to do and say things online that they would not do or say offline, compared with just a third of American respondents. “Having a bright, extravagant QQ avatar was a big comfort to me when I was upset,” Peng says, remembering her schooldays.

QQ coins are in such demand that they even impact China’s national currency. Thousands of QQ users who’d earned coins in online games began selling them for cash in 2007, launching China’s first period of virtual currency speculation. In some rural areas, where debit and credit cards are scarce, stores began to accept QQ coins as payment for real goods and services, while China Merchants Bank launched a debit card offering 25 percent discounts when making QQ Show payments.

“QQ coins were being traded with such volume and frequency that they did start to drag down the value of the yuan,” one financial analyst told the Wall Street Journal. In other words, demand was so great that QQ coins began to have more buying power than genuine Chinese banknotes.

The rise of QQ coins was also blamed for a variety of perceived social evils in China. QQ’s network was awash with talk of “QQ girls” who offered to trade online sex for QQ coins. Gambling is illegal in China, but online mahjong games paid for with QQ coins could be converted into cash prizes, creating a new grey gambling market.

A Chinese court handed down the country’s first-ever criminal punishment for the theft of virtual goods in 2009, in the northern province of Heilongjiang. Three men approached their victim in a cyber café after noticing that his QQ account was unusually full of virtual goods. After the victim was assaulted, he was forced to hand over nearly RMB100,000 worth of virtual goods to the attackers, including weapons for online games, according to official reports.

The growing impact of QQ coins was also enough to worry top government ministries in China, including the central bank, which announced it was “on the lookout for any assault by such virtual currencies on the real economic and financial order.”

A Social Force?

Another QQ innovation over MSN was the “QQ Group” (群 Qún), which offered chat users with shared interests a way to stay permanently in touch. “QQ is fundamentally a group thing,” internet researcher Tai says.

There are now over 100 million QQ groups, catering to a panoply of social interests, from fans of particular TV shows to astronomy enthusiasts. A look through the groups on offer also highlights some of the more unique aspects of Chinese society. There are QQ groups for so-called xiaosan (小三), or the mistresses of wealthy businessmen, as well as the wives who discover their husband has a mistress. Another group caters to women who have found out that their husbands are gay.

“People who use QQ groups are looking for information which isn’t available in the mainstream media,” Tai says. The groups give a platform to Chinese subcultures, but do not extend to more political groups. “Very few QQ groups are formed based on political interest,” he says. Tencent is open about its censorship of sensitive political content from QQ, but most of QQ’s user base lacks an interest in political topics. “If you are starting political conversations on QQ you are likely to become a loner,” Tai adds.

Aging Populations

Tencent is still China’s largest internet company, with annual growth reaching as high as 60 percent over the last decade. But its expansion is slowing, and there is a pervasive feeling that the online goods and games market may have reached saturation point. “There is a ceiling on internet value-added services, so that is giving us a sense of urgency,” Tencent founder Pony Ma told reporters last year. In response to declining revenues, Ma has pledged to invest more than 10 percent of sales into Tencent’s research and development program, which already employs half the company’s staff.

In recent years QQ has faced tougher competition from new social networking services such as Renren, which were deliberately modeled on Facebook. “Since I started university, I’ve been using Renren much more than QQ,” Peng says. “The add-ons and apps are better suited to university students. But I still open my QQ account; it’s the most basic part of using the internet,” she adds. That’s a view reflected by internet analyst Yang. “Nearly all Chinese people have the habit of logging on to QQ after turning on their computers,” she says.

New social networks, such as Tencent’s own voice messaging service Weixin (微信), are unlikely to change that habit, according to Yang. “When Weixin asks if you want to add friends, adding your QQ friends is the first option,” she says. Microblogging services serve a different function than QQ, according to Tai: “Weibo is still fundamentally about sharing information, such as news links and commentary,” he says. “But QQ is mainly an entertainment platform.”

Reaching the elderly still offers QQ a hope for expansion. “There’s definitely been an increase in middle-aged and elderly users of QQ in the last few years,” Tai says, explaining that elderly users are turning to QQ to stay in touch with family members. That raises an enticing prospect for China’s virtual goods market: virtual armchairs and false teeth, anyone?