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Is a dotcom bubble forming in China?
There is no shortage of potential triggers for a global market correction next year, says Matthew Lynn. But one of the more likely is a huge bubble in Chinese tech stocks.
A flotation by Snapchat that values it at more than $25bn. Initial public offerings for Uber and Airbnb, with price tags of more than $50bn attached. Soaring share prices for the "Fang" stocks that include Facebook, Amazon, Netflix and Google.
It is easy to conclude that the biggest trend in the stockmarket in 2017 will be the vast valuations attached to the giants of Silicon Valley and to infer that a rerun of the dotcom bubble of 1999 and 2000 will be on the cards. There may well be an element of truth in that. But the real threat of a tech bubble is not on Wall Street or in Silicon Valley it's in China.
Just take a look at some of the figures. Four of the seven most valuable private companies in the world are Chinese and all of them are less than seven years old. They include Didi Chuxing, the ride-sharing app, and Xiaomi the smartphone manufacturer. Both have valuations of more than Snapchat and Airbnb. Alibaba, the Chinese version of Amazon, of course leads the way, with a market value of close to $250bn. Tencent, the Chinese social-media giant, is just as big and it is already one of the ten largest companies in the world.
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But there are many more coming up fast. In the last year, 19 "unicorns" as start-ups with a value of more than $1bn are known were created, and by the end of October this year another ten had joined that list. Meanwhile, the amount of venture capital funding going into Chinese internet companies has grown fivefold in the past five years. At $20bn annually, it is now more than is going into the formidable American tech sector.
Of course, it is easy to see why investors are excited. Combine China's vast markets, rapid growth and the explosive potential of the internet, and you are going to get some very big businesses. It's not just that China is a huge market for technology, it is the only major economy that seems to be able to resist the American giants and create its own major players although Chinese protectionism, disguised in the form of censorship, may well play a big role in that.
While the likes of Google and Alphabet, and now Uber and Netflix, dominate the American, European and Japanese markets, in China they face stiff local competition, which has often outgunned them. Even Amazon hasn't been very successful at steamrolling its way into China, and while the iPhone was initially a big hit, it's now in retreat. If you want to invest in a firm with the potential to grow to $100bn-plus, then China is probably the only place outside of California where you can do that.
That is great if it works, of course. But there is also a clear risk even if the world is not paying much attention to it right now. Internet stocks are inherently volatile and there is inevitably a lot of hype in their valuations. But so too are China's underdeveloped and speculative bourses. The Chinese are inveterate gamblers, and tend to treat the stockmarket as a casino. Put the two together and it's hard not to conclude that the combination will be explosive.
There are plenty of things that could trigger a global market correction in 2017. It might be a sudden rise in US interest rates. It could be France leaving the euro. It could be a crisis in the bond market. But the most likely factor may well be a huge bubble in Chinese tech stocks and the kind of crash that will inevitably ripple out around the world.
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Matthew Lynn is a columnist for Bloomberg and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
