Excessively high valuations for Chinese Internet companies raise specter of dotcom bust

By Wang Jiamei Source:Global Times Published: 2017/12/18 22:23:40

While Chinese Internet-related IPOs have been getting high valuations in overseas markets, domestic regulators shouldn't forget the dotcom bubble of the late 1990s. Any repeat of that spectacular boom and bust may backfire and overshadow the development of China's Internet sector.

Despite the robust increase in US stock markets this year, shares of some newly listed Chinese companies performed poorly. According to data provider Dealogic, 16 Chinese companies debuted on the US stock markets this year, and 10 are currently trading below their IPO prices, The Wall Street Journal reported on Sunday. The report singled out Chinese online lender Qudian Inc as the worst performer, with the shares down 46 percent as of the Friday close compared with its October IPO.

Most of the struggling US-listed Chinese companies are from the Internet sector. Although they commanded high valuations in the overseas market, their performance reflects the risks of a bubble in China's Internet sector, which may burst.

Chinese Internet companies are burning cash at a furious pace. Some of them offer huge subsidies to customers in the hope that their competitors will fail before they themselves run out of cash. Others just pour massive amounts into the seemingly promising sharing economy, artificial intelligence or other advanced technology sectors, where profits have yet to emerge. Similar to the dotcom bubble, Chinese Internet companies are also trying to convince investors that profit is no longer important.

Bubbles may be inevitable in the Internet sector. New technology often takes a long period of high investment to generate a profit. But ultimately, a company either has to make a profit - or not. Without a sound business model, it is just a matter of time until cash-burning companies encounter liquidity problems, triggering a burst in the bubble.

It is not just profligate start-ups that will bear the brunt of any such bust. The whole Internet sector in China will suffer a major setback from any such collapse as it may be harder for the industry to attract new investment, which will hamper its development.

With the Internet Plus initiative vital for China's economic restructuring, the nation's policymakers should keep a careful watch on bubble risks and act to prevent bubbles from popping. If the sector squanders too much money, it will backfire, a threat that calls for strengthened regulatory governance over the Internet sector.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn

Posted in: EYE ON ECONOMY

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