Chinese tech stocks are a 'bubble in the making'

Chinese technology stocks are now more expensive than the Nasdaq was at the height of the dot-com bubble.

A report from Bloomberg News on Tuesday noted that the price-to-earnings ratio of Chinese internet stocks is now at 220 times earnings, way above the 156 earnings multiple the Nasdaq garnered at the height of the tech bubble in March 2000.

“Chinese technology stocks do resemble the dot-com bubble,” Vincent Chan of Credit Suisse told Bloomberg. “Given stocks fell 50%-70% when that bubble burst in 2000, these small-cap Chinese shares may face big corrections when this one deflates.”

Teng Bingsheng, an associate dean at the Cheung Kong Graduate School of Business in Beijing, told Bloomberg that the market is a “bubble in the making … valuations are extremely expensive.”

On Wednesday, the Shanghai Composite, China’s main stock index, hit 4,000 for the first time since 2008, bringing its gains over the last year to nearly 100%.

Bloomberg noted that while valuations for Chinese tech stocks is sky high, this sector represents about 13% of the overall stock market in China, less than the 31% that tech stocks accounted for in the US during the dot-com bubble.

This news also follows a report last week that showed 6% of China’s newest stock market investors can’t read.

“That doesn’t mean it can’t be sustained,” Bloomberg’s Tom Orlik wrote in a report last week. “China has a large population with a substantial volume of savings and limited alternative investment options. It does mean that the trajectory of China’s markets will be unpredictable, and prone to sudden reversals as sentiment shifts.”

Read the full story at Bloomberg here ยป

NOW WATCH: Animated map shows what would happen to China if all the Earth’s ice melted

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.