The Great Chinese Tech Stock Bubble

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The Great Chinese Tech Stock Bubble

When the U.S. tech stock bubble collapsed, it left carnage everywhere, particularly in the portfolios of otherwise-sensible investors who got caught up in the frenzy and saw their wealth evaporate. In the end, everyone swore it would never happen again. But a similar bubble is already emerging, just not in Silicon Valley and Boston. The tech companies that are bedazzling investors with visions of easy profits are located in Shanghai and Beijing.

The Chinese tech stock bubble is growing swiftly, and the best way to put it into perspective is with two simple metrics:

  • At the height of the U.S. dot-com bubble, in March 2000, the mean average price-to-earnings ratio of U.S. technology stocks was a frothy 156.
  • Today, the average P/E ratio for a Chinese tech stock is 220.

That's the highest P/E for tech stocks anywhere in the world. In fact, of the global tech companies with a market valuation of $1 billion or more, every single one of the fifty top performers this year is a Chinese company.

As a report in Bloomberg Business points out, "Like the rise of the Internet two decades ago, China's technology shares are being fueled by a compelling story:1 The ruling Communist Party is promoting the industry to wean Asia's biggest economy from its reliance on heavy manufacturing and property development. In an echo of the late 1990s, Chinese stocks are also gaining support from lower interest rates, a boom in initial public offerings, and an influx of money from novice investors."1

As Trends subscribers already know, China's economic growth has stalled as its labor costs have risen. Developed countries can outsource production to countries where labor is cheaper, while the American manufacturing renaissance we've chronicled in previous issues is providing stiff competition and weakening demand for imports.

So China's government is responding by investing heavily in science and technology, and millions of small investors are following the government's example. Stock-trading accounts are being opened at an unprecedented rate, with 5 million accounts activated in March 2015 alone. And huge amounts of leverage are being used to buy shares. As The Economist reported with some concern, investors borrowed a record $269 billion as of April 13, three times as much as a year earlier.2

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