So whatever happened to the Asian technology boom? The rout in regional Internet stocks is less than a week old, but already the question is being asked. The reason is that many never took it seriously to start with. The abiding suspicion is that a few big foreign funds late last year saw the chance to trigger a US-style Internet mini-boom by cornering a few big stocks and letting Asian investors' instincts do the rest. As such, financial markets ran far ahead of the underlying economics, giving huge unjustifiable valuations for companies pursuing business models that have already been overturned in the more established US market. Against the backdrop of tightening global credit markets and old economy stocks that have experienced a three-month bear market, this was simply the inevitable Ides of March, as Dresdner Kleinwort Benson described it. If you believe that, Hong Kong has engineered a particularly interesting, but all too familiar technology boom. Few doubt the SAR will play a central role as a commercial Net centre. Consumer Web products are being developed by the bucket load. More importantly, business-to-business applications promise to transform it from a global trade sourcing hub to an industrial portal of manufacturing products and services. The growth prospects are undoubtedly huge. International Data Corporation tips the Asian (excluding Japan) on-line population to grow from 21.8 million last year to 95.2 million by 2004, with revenues rising from US$95.2 million to $87.4 billion. In the business-to-business sector the numbers are even bigger, with the Gartner Group estimating transactions in Asia Pacific (excluding Japan) will grow from an estimated $9.2 billion last year to $995 billion by 2004. This adds up to the undoubted proposition that the Internet will radically change the cost structure and distribution methods of whole industries, and create big winners among those who adapt. The question is, how does this accord with the valuations and early-mover stocks that have grabbed investors' attention? The genesis of the Asian Internet boom was Japan and that is where the recent sell-off began. Softbank, the investment holding vehicle of Masayoshi Son, made savvy mid-90s investments in US firms such as Yahoo! that subsequently dominated the consumer Net market. He transferred those brands to Japan and talks eclectically of creating a 'Net-batsu', or confederation of firms, in its stable, sharing ideas, personnel and Internet traffic. Sceptics crowed that the firm's opaque accounts made accurate valuation difficult, but that didn't stop it becoming Japan's fourth biggest firm by market size. But like other Net holding companies the free float in its stock was extremely small. Subsidiary, Yahoo! Japan traded in miniscule volumes. What had proved an ideal environment for an equity spiral worked equally in reverse as brokerages pulled margin loans and fund managers sought to unwind positions. From the middle of last year, Hong Kong companies, led by Pacific Century CyberWorks, saw a similar spiral in its share price with a very small free float traded. Phase two saw the SAR's ever-enterprising financiers promise majority shareholders of old-world, usually loss-making, listed shell companies Internet transformation opportunities and a shot at the equity spiral. Japanese firms such as Hikari Tsushin, together with CyberWorks, achieved this with Golden Power International Holdings, Sega. com bought into Cheong Ming Holdings and Softbank assumed control of Cheung Wah Development. The effect was to offer valuation benchmarks for other shell companies with a half-plausible Internet strategy. As an exercise in financial engineering, comparisons have been made with the 1996-97 red-chip boom. Given the way that ended, few market practitioners are rushing to make that link. There are, of course, some big differences this time. The Net boom is a global phenomenon that has overturned traditional valuation methods. Considering that with minimal capital employed a good idea could end up dominating a whole market sector, that arguably makes sense. The question is really what risk premium you put on success. At the moment, investors are mostly full of boundless optimism. Tomorrow they may not be. The point is that Hong Kong has, for once, not had to create its own bubble. There is, of course, a less generous explanation. Arguably, it is simply the currency peg that creates the underlying liquidity conditions for such bursts of speculative activity. With the balance of payments having swung positive (due to reduced imports and less capital outflows) the domestic monetary system is awash with liquidity, while there is a dearth of good money-making schemes. Seen this way, the Net boom amounts to simply changing the theme, while the market players and methods of finance remain the same. That may be true of markets everywhere, but time spent at the daily press conferences of new ventures confirms that the biggest talent of most SAR Net plays is playing the financing game rather than building real businesses. Other reasons to doubt the boom's sustainability is the pure paper funding of most stocks. While red chips achieved giddy valuations as investors placed ever higher valuation multiples on each new asset injection they were able to keep raising cash through fresh equity issues. Much of this cash simply went into punting other red chips. While it ultimately could not last it at least ensured that the market fizzed for more than a year. Most Net stocks do not have this luxury. In the US, all but the biggest advertising-driven consumer-focused Web sites have been subject to dramatic downward revaluations. Indeed the market has radically re-assessed where value will most likely be extracted - infrastructure and application service providers are particularly in favour. If SAR-listed Net plays do not quickly show a sustainable business model they can expect equally harsh treatment. Investing in this environment remains a matter of guessing the market momentum and picking likely deal-stocks. Then again that's the way it always was for all but the insiders.