Tech Market WatchBy Perry Wu
The Chinese domestic press have been rife with rumors of an impending government bailout of the stock market. With the Shanghai and Shenzhen stock markets at record lows, investors have grown increasingly concerned about the state of China's equity markets. But thinking about this as a problem about "stock markets" is the wrong approach. There is a deeper issue here and it is not about the stock market.

Foreign analysts spend an excessive amount of time trying to understand the different rules and systems that govern China's equity markets. For example, foreigners are restricted to specific share classes of particular Chinese companies, and these rules are constantly in flux. So foreign investors routinely make pilgrimages to the two Chinese stock exchanges in Shenzhen and Shanghai in the hope of gaining some insight into China's increasingly market-based economy. Since the early 1990s, financial institutions have written many reports promising to give "insight" into China's markets.

What a waste of time.

Ultimately, the stock price of a company goes up or down depending on the quality of the company and the cash flows of a company. Regardless of what rules China establishes for its equity markets, it is the listed companies themselves that determine stock prices. Maybe foreigners should spend a little less time analyzing stock exchange rules and more time explaining the listed companies, themselves. The record lows in the stock market are probably more a reflection of the quality of the companies and their management that have listed than anything about the stock market itself.

Finding a domestically-listed Chinese company that is well-managed and can generate consistently growing cash flows over time is just as difficult as finding the same overseas. No amount of change in the rules of the stock markets, or new government money coming in to help the market, will change this.

The strength of China's economy now rests in the millions of small-time entrepreneurs who toil in obscurity. It is their companies that are ultimately the real engine of China's growth, and it is their companies that ultimately are the most profitable. The large companies that are fortunate enough to list on China's stock exchanges , on the other hand, are frequently inefficient, formerly state-owned enterprises whose only strength is that they are big. No amount of analysis of the "market" will help this.

For Chinese tech companies listed both in Asia and North America, the same is true. Reports about declines in the tech stocks disguise the fact that good, profitable tech companies will have increasing stock prices regardless of the "market". The trick is finding them.

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