Jul 12, 2012 · 3 minutes

I’ve written before about how China’s proposed new Internet regulations further harm Facebook’s chances of ever entering the country, and the impact they could have on services like Sina Weibo. But a couple of days ago, I talked to one CEO who made a big call to preempt the rule changes by introducing ID verification despite fears it would drastically reduce user numbers. The risk appears to have paid off handsomely.

Jason Tian, the co-founder and CEO of matchmaking service Baihe, said the company’s management agonized for six months over whether or not to require members to register with their ID numbers (like the US’s social security numbers). No other Chinese Internet service had made such a move, and some analysts had predicted it would cost Baihe more than 50 percent of its users.

Baihe itself surveyed existing and potential customers and determined that although the new requirements would reduce the number of current users by about 20 percent, it could attract new users who had never tried online dating, as well as serious singles registered on other sites that had more lax rules about who used their services. Baihe, which, up to a point, is free to use, makes most of its money by selling premium features to its members. It claims 39 million registered users.

Until it introduced real-name registration in March, Baihe, like its competitors, had problems with users who would cheat the system. For instance, in one common scam a woman would suggest meeting a man for a date at a restaurant. While there, she would order lots of expensive wine and food at ludicrously inflated prices. Then, at the end of the evening, the man would be expected to pay the huge bill. Of course, the woman had been recruited by the restaurant to run the scam, and would get to share the spoils. Without knowing his date’s true identity, there’s little the unfortunate suitor could do to seek justice.

In China, the world’s capital of fake products, food safety scandals, and other business scams, trust is a hugely important issue. That’s a large part of the reason why ecommerce took a few years to really take off here, and it’s also why the pay-on-delivery system is so widespread. Many consumers here want to be sure that a product they ordered online will actually turn up before they hand over their hard-earned cash.

So, even though ID verification on the surface would seem harmful to Baihe’s business, the company actually earned an advantage by making the leap early. It announced real-name registration on December 15, says Tian, and was the first company in China to do so. The next day, Sina Weibo announced it would do the same thing.

It’s difficult to verify the figures, but Tian claims the impact was dramatic. There was a 90 percent reduction in number of complaints about scams, he says. Average revenue per user almost doubled. And while user numbers initially dropped by 20 percent, the total number of users ultimately climbed by 7 million, thanks to the extensive news coverage it received. Tian says Baidu’s news aggregator turned up more than 600,000 links to reports about the change.

Baihe’s case presents an example of the unexpected, and unintended, benefits of the government’s proposed rules for real-name registration. The company not only managed to improve trust on its service, but it also got a lot of favorable press, increased traffic, and cultivated a higher-quality membership, resulting in a virtuous cycle. Its competitors may follow suit, but when they do it will be old news. The PR bump won’t be as significant, and many of their users would have already bolted to Baihe.

At first glance, the government’s new Internet rules might seem like Big Brother-ish over-reaching. But Baihe’s case presents an argument that they might not be all bad.