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China's Tech Rally Starts Where Nasdaq's Ended

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Investors won’t think twice about eye-watering valuations so long as Beijing keeps spending on the sector.
China is nothing if not ambitious. Facing a coronavirus-battered economy, Beijing is speeding up an infrastructure build-out to stimulate growth, vowing to spend an estimated $1.4 trillion over five years on areas such as 5G, industrial automation and cybersecurity.
This enthusiasm has propelled a fast and furious surge in stocks. The tech-heavy ChiNext Index is up 46% this year, and sports an eye-popping valuation of 35 times 2021 earnings. That’s above the Nasdaq Composite Index’s 27.5 times, which is already expensive and reason enough for the rally to fade.
Investors are smart to play in fields where the fiscal dollars are. But it’s also a dangerous game. What’s recurring income and what counts as extraordinary items? Once we remove government subsidies, the valuations of China’s tech darlings become even airier.
Helicopter money can come in many forms. First and foremost, Beijing is a large client. Even before the coronavirus, the government was the biggest buyer of IT security, accounting for 27% of total spending last year, according to IDC. Meanwhile, the latest policies, which require stringent security reviews, clearly favor local providers. Investors have picked up on this theme: Shenzhen-based Sangfor Technologies Inc., with a 25% and 22% market share in China’s VPN and content security segments, has soared 89% this year to $12.6 billion in market value.
There are also regular cash handouts that lubricate companies’ daily operations, and money for new industrial parks.

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