China’s Internet Bubble Could Hit Wall Street
The Renren Inc. (RENN) was China’s first social networking service provider to be listed in the US on Wall Street. It is now trading at $19.50, which is an increase of over 40 percent from its issuance price.
Could this possibly be a trend for Chinese based internet companies like the one that US based online firms faced in the 1990s? During this time frame many of these corporations saw their market capitalizations skyrocket to levels once unimaginable. Only to see them later plummet at even a faster pace.
Many other China based companies are arranging dates to make their Wall Street debuts; these include Jiayuan.com, Phoenix New Media Limited, Tudou.com, and 61.com.
The explosive gains by Renren pushed its market capitalization up to $7.7 billion, which outpaced the Sina Corporation (SINA) at $7.5, even though it is one of China’s four major internet portal operators.
Renren did have a very good quarter, increasing its user base by 5 million, which was a 19 percent increase. Because of this the company revised its future projections upwards. But, even Chinese companies do have a ceiling to their growth, which makes its market capitalization even more puzzling.
Even as Wall Street was tumbling, Renren was surging straight ahead without any obstacles in sight as its share price increased by 15 percent on its second day of trading.
The SEC issued a cautionary statement about Chinese firms utilizing “Shell Corporations” like Renren did to fast track their listings on Wall Street. They stated that some of these companies have deficiencies with their accounting policies, and even went on to state that in some cases it could be considered fraud.
Only time will tell if Chinese based internet companies listed on Wall Street will be able to maintain their share prices. Or will they face the very same bubble so many US firms did, only to see their values drop sharply at a later date?