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Red chips soar in Hong Kong

The Hong Kong stock market hit a record high on the last day of trading under British rule as the volume of business soared to the third- highest level in the exchange's history.

However the real excitement was not seen in the blue-chip Hang Seng Index, which rose a modest 0.5 per cent, but in the Red Chip Index, which soared by almost 7 per cent. This index tracks companies controlled by mainland Chinese entities. Yesterday's huge rise is part of about of red-chip fever which has produced enormous price rises in shares of companies under Chinese control and companies rumoured to be in the sights of Chinese entities.

The two non-red chips which showed the biggest rises were Hang Seng Bank, controlled by British-based HSBC Holdings, and Hopewell Holdings. Both are rumoured to be targets for a Chinese takeover. Meanwhile shares in one of the biggest red-chip companies, China Everbright, soared by 35 per cent.

The Hong Kong market has proved itself to be no rest home for widows and orphans. It might be under British control but it is a thoroughly Chinese institution reflecting the passion for high stakes and gambling.

However Hong Kong shares have proved to be a far better gamble than any day at the races. In the last year of British rule the Hang Seng Index has risen by some 30 per cent.

When Britain signed the treaty for the handover to Chinese rule in 1984 investor confidence plummeted and the index dwindled to 764 points. Yesterday it closed at 15,197, up 68.77 points on the day.

The market has been so transformed that it is barely recognisable from the days when four stock exchanges merged into a unified exchange in 1986. On the first day of business shares worth HK$226m (pounds 18m) changed hands. Yesterday turnover topped HK$26bn (pounds 2.08bn).

A Securities and Futures Commission now holds the ring around this raucous business centre but, even with its enhanced powers, it can do little to stamp out rampant insider trading and other malpractices.

The exchange's determination to become a capital raising centre for China has brought back a flavour of "guanxi" or connections which harks back to the old exchange's cowboy days. With 27 subsidiaries of Chinese state corporations listed and a further 48 red chips on board, the Hong Kong exchange can claim to be the biggest external market for investors wanting a share of the growing Chinese economy.

The downside is that little attention is paid to intrinsic value as all eyes are focused on political connections. In May the politically well connected Beijing Enterprises came to the market with a record 1,276 times oversubscription. No wonder the old British trading companies which used to dominate the exchange are looking rather sad and neglected these days.