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Thoughts on the Chinese Tech Bubble

Reminiscent of the US dot-com bubble of the mid 90’s to early 2000’s, many investors today believe that US traded Chinese tech companies are nearing their own eventual “burst.”

Chinese tech companies listed on NASDAQ have been able to effectively raise capital and drive impressive returns. For example, over the last couple of years many companies like Baidu (NASDAQ:BIDU), a search engine similar to Google, have seen dramatic growth. Specifically, since 2009, Baidu has seen their stock skyrocket from around $12 a share to today’s close at over $154.  Other companies like Sina, an information and entertainment hybrid who also runs Weibo, China’s version of Twitter, has seen similar growth over the same time frame.  Sina’s share price has increased from around $30 in 2009 to today’s close at $114.

But like many things that seem too good to be true, significant problems have been found with many Chinese listed companies. Many of these problems are relating to accounting irregularities and fraud, brought on in part by the lack of oversight by financial regulating authorities in both in the US and China. Many investors also question the discrepancy between tech companies large financial paper value as compared to their low revenue.  Furthermore, there is debate over the real value of web users. In many cases the number of users seems large, but taking into consideration the size of China’s population, the relative percentage is actually much smaller than that of US company counterparts.

Growing concerns over fiscal transparency and revenue-related issues (among others) have raised serious questions about the long-term growth potential of US-listed Chinese tech companies. The question many are asking going forward is, ”Can investors expect this trend to continue in the future?”

Of course, no one really knows the answer. And then again, the forecast for the future can change considerably depending on whether we look a year out, or 10 years out. I think that a market correction is inevitable, especially when comparing revenue to market growth. The bigger this discrepancy, the more confident bullish investors become in anticipating a catch-up of profit, which may take a while to achieve, or may never happen at all.