Like an explorer surveying a new land, Alex Tang spotted and named something new. That something is a type of stock listed in Hong Kong that gives investors unique opportunities to buy into China.
The year was 1992. China was a mere 14 years removed from its historic shift from a centralized, command economy to a more-or-less free market approach. A few big market-oriented Chinese enterprises that had developed could not raise much money from listing A-shares on the infant stock exchanges in Shanghai and Shenzhen. They turned to the well-developed market in neighboring Hong Kong, establishing companies in the city and then listing them on the local exchange. Tang, then head of the research department at Dao Heng Securities, called them “Red Chips.”
“You could see the trend coming in Hong Kong and the companies were growing rapidly,” Tang, who is now head of research at Core Pacific-Yamaichi International, told China Gate. In 1997 the Stock Exchange of Hong Kong launched the Red Chip Index.
Since then the number and size of Red Chips has grown and dozens of big Chinese companies have directly listed in Hong Kong without setting up a company there. These are the “H-shares.” Both types of stocks offer a potential window to China’s world-beating economic growth. But Red Chips have an edge: While most H-shares have long been listed on Mainland markets, Red Chips are just taking the first steps for IPOs next year.
That’s big because now Chinese markets are much bigger than Hong Kong’s exchange. Shanghai and Shenzhen combined have 70% larger market cap and 150% more daily turnover. Tang said that listing in China now can raise more money than an IPO in Hong Kong. One reason is that A-shares trade at about 20-25 times forecast earnings compared to about 17 for Hong Kong. And A-shares are denominated in China’s renminbi, which is gradually appreciating against the Hong Kong dollar, which is linked to the U.S. dollar.
The prospect of near-windfall offerings in China has already boosted some Red Chips. Heavyweight China Mobil (HK No. 941) surged 7.5% on August 6 to almost single-handedly turn a loss on the Hong Kong blue chip index to what was then the year-high.
It’s probably too late for now to get on the band wagon because it’s no secret some Red Chips will list on the Mainland, probably starting next year. “I suspect the listing has already been figured in the share prices,” said Ben Kwong, chief operating officer of KGI Asia. “And it’s unlikely to happen in the near term. It takes time for Chinese authorities in China to approve the listing.”
However, Red Chips’ day may come. One of the themes Core Pacific is working on for next year is a potential rise in Red Chips. “Listing as A-shares may generate some buying interest in Red Chips like Lenovo (942), China Mobile, (conglomerates) Citic Pacific (267) and China Resources (291), (oil producer) CNOOC (883) and China Travel (308),” Tang said. End
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