By Perry Wu
The American humorist Garrison Keillor famously wrote about a mythical town in America where "all the kids are above average". To the majority of commentators and financial analysts, this seems to be the conclusion about Chinese technology companies.
On the other hand, when I write a "negative" column about a particular company, I often get email from readers attacking my confidence in China and China technology. This is unfair. I think investors need to take a deep breath, step back, and think about a few things.
Now that China is increasingly a market-based economy, people need to remember what "market-based" means. In any market-based economy in the world, the vast majority of companies are destined to fail. That is an inescapable fact that was true 200 years ago, is true today, and will be true 200 years hence. It is true because most companies in the world sell unexceptionable products, have average management, and are subject to much competition.
My dear reader, it is not the "negative" columnist like me you should be worrying about. It is the almost-always-have-positive-things-to-say analysts, usually employed by media outlets and financial services companies, who should arouse suspicions. Really, when you look at what some of these analysts have said, it is almost never negative.
Take this analyst named Safa Rashtchy, who is employed by Piper Jaffray. His name pops up in many news reports about the Chinese technology sector, and he is almost uniformly positive about the companies in the sector. When game company Shanda (SNDA) recently decided to purchase a stake in Internet portal Sina (SINA), this is what he wrote in a research note: "Shanda's action shows that Sina's dominant position commands significant attention and one that makes it a strong long-term partner."
Aside from being a jargon-rich this is indicative of the stuff coming out from analysts. Why doesn't Mr. Rashtchy tell the truth, which is that this is a tale of one grossly-overvalued company (Shanda) buying a stake in another overvalued company (Sina), and that over time this is a stupid strategy for both companies. Just as in the Great Tech Bubble of the late 90s, the market will eventually sort this out, but don't rely on Mr. Rashtchy or others to tell you that.
This is not to say that China itself will fail. Oh no, the forces that have been released over more than 20 years in China, it is now safe to say, are irreversible. Although China will surely be subject to wild swings in its economy over the coming years, China will succeed over time.
But at the same time, as counter-intuitive as this may sound, most Chinese companies will fail. The fact that a company may be listed and publicly traded on a foreign exchange does not change this harsh reality.
There is that old line that goes something like "friends are people who tell you what you don't want to hear." Investors should keep that in mind when reading commentary on the Chinese technology sector. Got that, friend?
About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.