It’s no wonder that bankers and investors like China tech. It is a perfect marriage of two of the biggest growth stories in financial markets today.
On one hand, there is exposure to China and its 7% GDP, huge workforce, burgeoning middle class and expanding — potentially dominating — economic power.
On the other, there is technology, the source of high growth, high return companies in new and exciting industries and which have the possibility to change society in ways few can even imagine.
But take a closer look at some of the companies being pitched in this universe, and while the China part may be intact, the tech part is less solid.
Take LightInTheBox, for example. Nice techy name, but it sells goods online, with wedding dresses its biggest product. It is a retailer, not a technology innovator. Vipshop may have had one of the most successful IPOs in the US last year, returning around 150% since its launch, but it too is a retailer.
And it does not end there. Many so-called China tech stocks that have listed in the US actually belong to the age old industry of retailing. The idea that online retailers, even those based in China, are the same sort of equity story as Facebook or Google is fanciful.
Of course, this labelling did not start in Asia. Amazon.com is the highest profile and, arguably, most successful example of an online retailer. It firmly belongs in retail.
Perhaps Amazon’s success and its ability, so far, to ride out the financial crisis without taking too big a hit to its bottom line encourages people to think that online is somehow different from traditional bricks and mortar retailing. But whether a company’s shopfront is on a PC or the high street, those best able to adapt are the ones that will survive. Others will fall to the wayside. Remember Boo.com?
Of course, this isn't much of a problem when companies are in the minority. But as online retailers in China multiply, there are bound to be failures when the country eventually experiences a fall in growth and consumption.
When that does happen, investors will be left asking how their counter-cyclical tech stock has turned out to have a high correlation to the wider macro-economic environment.
It is time to be honest about China tech companies. Rather than lumping them in with the Microsofts and Apples of this world, they should be seen as a sub-sector of retail. It might not be as compelling as tech, but it is more accurate. And for investors, it's a much more sensible approach.