China's technology shares are climbing at a tearing pace. However, the boom won't end with a crash as it did once on Wall Street, writes DW columnist Frank Sieren.
Fears of western analysts of potential bubbles in the Chinese economy seem to have no end: at first there was the debt bubble, then a real estate bubble. Now, the country is facing a dotcom bubble, like the one that popped on Wall Street in 2000. With that said, this apocalyptic warning, too, should be viewed with the awareness that although China may demonstrate comparable symptoms, it doesn't necessarily mean that the patient has the same illness.
Indeed, Chinese technology shares have soared recently. Shanghai's tech index has made gains of some 70 percent since the beginning of the year, tripling those made by the index of leading shares.
On average, Chinese technology shares are valued at around 220 times their annual gains. By comparison: When the US tech market, Nasdaq, reached its historical high in 2000, the companies on it were valued at 156 times annual profits. Of course, this was a far too dramatic rise that - sooner or later - would have to lead to a crash.
And the same will most likely happen in China, like in the US and Europe back then, that a number of small investors who entered too late and exit too soon will incur severe losses.
Less of a shockwave
With that said, if there is indeed a crash, it will not mean that the entire economy will be dragged down with it, like 15 years ago in the US. Back then, around a third of the entire market capitalization was provided by IT companies. And the technology market was far more subsidized by the finance industry.
In China, market capitalization by tech companies is around 11 percent. There are enough other branches that can provide stability in the case of a crash. And we have already seen that a stock market crash in China doesn't necessarily have to lead to disaster for the real economy. Seven years ago, stocks rose to three times their course within a few weeks, and ultimately they fell back to their original levels.
Many Chinese investors lost a lot of money back then - and their trust in the market. In the meantime, however, that trust is back. And there is a simple explanation for why technology shares - and with it the entire market - have risen so rapidly in the past months. For the first time in two years, this past November, the Chinese Federal Reserve began reducing the key interest rate.
Seeing as though real estate prices in China are currently declining slightly, many investors see the stock market as one of the few current ways to make yields. What's more: since November, investors the world over have been able to buy Chinese shares through brokers in Hong Kong. Until then, only very few foreign investors had been able to acquire shares of Chinese companies - most of them were institutional investors hand-picked by the Chinese government.
Tech sector financed by state
Now that's a thing of the past: And the prescribed volume of 1.7 billion euros that can be invested from abroad means that a lot of money is headed toward China.
Just like the Chinese themselves, many foreign investors are particularly interested in the technology sector. There is a very plausible argument for why the industry is developing well: the state wants it that way. It is one of Beijing's highest priorities to make its economy more innovative. The government wants to spend a lot of money in the coming years to promote Chinese IT firms.
And although it may be difficult at the moment - with shares rising so rapidly - to advise investors to jump on the train, it would also be far too soon to bet on their imminent fall.
DW columnist Frank Sieren has lived in Beijing for 20 years.