I'm sorry, but nearly every single one of these statements is simply incorrect.

1. Chinese sites are all "[rip-offs] rip-off of existing sites and translate of interface and function"

When anybody comes up with a good idea, a dozen other people will try the same thing. Have you ever seen Freundfeed? How many blogging sites are there out there (livejournal, blogger, blogspot, wordpress)? Copying of your idea encourages competition and innovation.

Indeed, the reality is the EXACT OPPOSITE of what you said: western companies fail here in China because they come and translate the interface and functionality, and then expect the locals to flock to their site and use it in the same way westerners would. They bring in a team of western managers to hire some locals to do the translation, and then basically sit there waiting for the $$ to roll in.

The problem is, the locals use the Internet in a radically different way from Westerners. The locals are nearly all kids, spend hours and hours a day in front of the computer, and are lonely and bored. (single child policy). They don't want to "connect" with their friends and post daily updates of what they're doing / eating for breakfast. They want to meet new people and play and talk about crap.

So, companies like xiaonei, that take the basic Facebook formula, but then add in tonnes of gaming and fun ways to interact with other people will of course kick the foreign companies' collective derrières. Ebay failed because they don't understand how locals pay for things. Taobao came along with a better idea and won the market.

2. "... any user generated content is strictly forbidden by the government ..."

China has a zillion BBSes (sorry, I don't have the exact number. It's huge). There are over 2 billion registered BBS users here in China - For only 300+ million internet users. People spend hours online with multiple accounts and personalities so that they can chat with their various girl- and boy- friends and take on different viewpoints in different places. (* note these are not old school dial-up BBSes but basically online community forum websites they just call BBSes).

People talk about politics all the time, either directly, or indirectly via codewords and the like. Avoid talking about organising large demonstrations and strikes, and you're likely to avoid the ire of any officials or censors.

Websites like Tudou.com, youku.com, and yupoo.com have massive massive massive amounts of content uploaded to them daily. Of course, lots of it is pirated TV and movies, but the locals are also constantly uploading the same kinda stuff you see on youtube and flickr. (Funny sidenote: the locals go to Herculean efforts to try and get around the ban on pr0n too. It turns out, they like it as much as anybody else in the world).

3. Months to get a license.

You can get an ICP, which is the local internet content license, in a matter of days. One of the big restrictions is that you usually need a local to do this registration for you. However, the reality of the matter is that few (if any) foreign companies succeed without local partners and the like here anyway (foreigners -really- don't get the local market), so it's not that onerous. Worst case, find somebody with a local husband or wife and just get them to help you with the whole process.

4. Companies copy your idea and overtake you.

What company in the US or Europe doesn't worry all the time that Google, Microsoft, or Apple isn't going to do the exact same thing? This is like saying "competition is bad". It's the cornerstone of what we're all doing here. And again, if your idea is good and you know what you're doing, you'll have a big edge over these guys. (There are one or two big examples to the contrary to what I've just said, but they're in court here in China and could very well go the way of the "little guy").

Every market in the world has its peculiarities, differences, and problems. China is no different. Look closer, spend some time really trying to understand the market, look at the numbers, and you'll find that this is a very fun place to do startups. Only 25% of the country is on the internet here right now. There are hundreds of millions of bored and lonely kids (and adults) who want to play and connect with others. The growth opportunities are staggering.