The Chinese Tech Bubble: All You Need to Know

The Chinese internet companies have attracted large amounts of investment, leading to a rise in their stock values by more than 50%. Investors calculate the value of a stock by calculating the share price and future profit estimates.

The stock's share price

The stock's share price is placed against the company's profit estimates, and both the denominations are compared. The result gives the investors the value of the stock price and has currently made the stocks of Chinese internet companies one of the world's costliest.

How did it Start?

China is the largest economy in Asia, and its overdependence on the industrial sector is not paying dividends. Economic growth has been the lowest in 25 years, and the Chinese government is counteracting that by spending more and more in the science and technology sector.

This has caused an unprecedented growth in technology and internet-related companies. Add to it low-interest rates on stocks, the boom in IPO and novice investors, and you have a tech bubble.

The Top Chinese Tech Companies to Benefit

Big players like Alibaba and Tencent have seen their stock prices soar above the 50% mark. While Alibaba's stock price has more than doubled, that of Tencent's has risen above a whopping 80%. Other major internet-related companies like JD.com and Baidu have recorded a stock value rise of about 50%.

This tech bubble has transcended into small companies as well. Zhong An is an online insurance company that clocked an IPO of $1.5 billion on debut in the Hong Kong Stock Exchange.

The demand for shares in the company was 400 times more than the available amount. In just five days, Zhong An's share price increased by 35% of the IPO. This vast IPO amount looks even bigger when you consider that Zhong An is hardly known outside China.

Echoing the Dotcom Bubble

The Chinese tech bubble is similar to the US Dotcom bubble of the late 1990s is both correct and incorrect at the same time. The Chinese tech bubble's driving forces are reminiscent of those of the Dotcom bubble, but that is where the similarities end.

The Chinese tech stocks' values are way higher than their American counterpart at the Dotcom bubble height. The price-earnings ratio of a Chinese tech stock now is 41% higher than that of an American tech stock in 2000.

Also, China's technology sector makes up for a small portion of the equity market, which was not the case with the US tech sector during the Dotcom bubble. This means that the Chinese stock market will suffer less when the bubble bursts, but individual investors will incur heavy losses.

 

Expectations and Courses of Action

Stock markets experts have mixed expectations from this tech bubble. Stockbrokers are hopeful of high revenues from Tencent and Alibaba to the tune of 50% and 40% profits, respectively.

They are encouraging clients to buy Chinese tech stocks as they believe that stock prices will only increase. Meanwhile, some stock market experts are expecting the bubble to burst anytime and are advising investors to invest in some other sector.