July 18, 2017 / 8:35 AM / 3 months ago

Xi pours cold water on China's "creativity" rally

HONG KONG (Reuters) - China’s innovation bubble is rapidly losing air. Investors, hearing President Xi Jinping signal for a crackdown on financial risk, are speeding their flight from expensive technology stocks and small caps into traditional economy blue chips. The overheated early-stage startup space might be next.

Chinese President Xi Jinping attends a news conference at the Chancellery in Berlin, Germany, July 5, 2017. REUTERS/Fabrizio Bensch

    Mainland investors read Xi’s weekend comments, delivered at a five yearly financial forum, as a sign conditions will tighten further. That poured cold water on Chinese small caps, and on the tech-heavy ChiNext growth board. Some 500 companies hit their 10 percent limit down on Monday. The ChiNext index lost over 5 percent, its worst day in years, and is down around 20 percent year to date, compared to a 10 percent rise in the benchmark CSI300. 

Graphic: China's tech-heavy ChiNext growth board has plummeted while blue chips rally: reut.rs/2u4ioxO

     The correction may mark the end of a broader trend that started in 2015, when Premier Li Keqiang publicly praised young entrepreneurs and said he would “stoke the fires of innovation”. Bureaucrats poured money into incubators and subsidized college student startups. Policy initiatives focused on upgrading the old economy helped pushed up valuations for tech companies - far above global peers. And subsidies flooded the country with more than its fair share of 20-something CEOs running online stores, bicycle sharing services, or doing something with drones.    

    But pragmatic Xi has now seized the economic reins from his idealistic premier, and he’s more focused on financial risk than reinventing the economy. Many entrepreneurial rock stars have fallen on hard times. Jia Yueting, for example, founder of tech empire LeEco, has become a poster child for hubris – and his flagship listed unit is one of the largest tickers on ChiNext.

For all the talk of transformation, in 2017 it was mostly traditional sectors, including export manufacturing, real estate, and old-fashioned infrastructure investment, that kept China’s economic growth on track. Government rhetoric about innovation and entrepreneurship is cooling too.

Taking the heat out of an overheated market is unlikely to depress genuine creativity - in fact, less cash might attract fewer copycats – and may make valuations more reasonable for investors. But for many wannabe CEO college kids, it might be time to write a real resume.

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