Warming to the dragon's mighty fire

It looked like the handover in reverse. Last month thousands in Hong Kong queued up to buy shares in Beijing Enterprises, whose franchises range from tickets for the Great Wall of China to McDonald's outlets.

The company received orders for 1,276 times the number of shares on offer in its debut. On its first day of trading, the stock tripled. The clamour to buy Beijing Enterprises is the most extreme example of the Hong Kong fashion for red chips.

This category of company barely existed 10 years ago. But at the end of last year the red chips were capitalised at HK$254bn (pounds 19.7bn), according to Nigel Chan and Annabel Betz of ING Barings Hong Kong team.

From 1993 to 1996 shares in the red chip index were up nearly 45 per cent a year - outpacing the 37 per cent average annual rise in the benchmark Hang Seng index of more conventional Hong Kong stocks.

As the handover grew nearer so did the explosive outperformance. "As the red flag goes up, the red chips go up," said John Mulcahy, managing director at Indosuez WI Carr in Hong Kong.

In the last six months the 41-stock Bloomberg Red Chip Index rose 75 per cent. The Hang Seng is up 13 per cent. On Friday the 10 most active stocks were red chips. Fuelling the rise has been investor fondness for the important ties the red chips have to Hong Kong's new rulers - they are partly owned by provincial administrations, industrial groups, even the Red Army.

Unlike mainland Chinese companies, which have listed their H shares on the Hong Kong stock market, the red chips are registered in Hong Kong. Frequently they have started life as little more than shell companies with few assets. Then they sell shares in Hong Kong and use the money to buy assets cheaply from their Chinese parents.

The rationale is that this helps the communists raise capital. "People realise Hong Kong is the gateway for China to raise money," said Stephen Ho, associate director at AIG Investment Corp Asia Ltd. Others look at the curious ways the red chips develop as quoted companies. "It's the way to privatise China," says Eddie Lau, an analyst at HG Asia.

According to Richard Farrell, who heads Asian equities at money manager Guinness Flight Hambro, plenty of Chinese money has found its way into the red chips, some of it in ways that raise eyebrows in the West.

"The terms of the asset deals have been so attractive that people in China couldn't resist," said Mr Farrell.

The authorities have also been concerned. In China companies wanting to sell assets owned for under three years to red chips now need permission from securities regulators, he said.

And Hong Kong regulators have delayed big shares sales by a subsidiary of China Everbright Holdings because it failed to provide details on its acquisition plans. Even if there is greater transparency in trading in red chips in future there is little doubt the stocks look expensive.

Start your day with The Independent, sign up for daily news emails
ebooksNow available in paperback
Life and Style
The 67P/CG comet as seen from the Philae lander
scienceThe most important scientific breakthroughs of 2014
Arts and Entertainment
Ian McKellen as Gandalf in The Hobbit: The Battle Of The Five Armies
Arts and Entertainment
Sarah Koenig, creator of popular podcast Serial, which is to be broadcast by the BBC
tvReview: The secret to the programme's success is that it allows its audience to play detective
Ruby Wax has previously written about her mental health problems in her book Sane New World
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Marketing Services Manager - (communications, testing, DM)

£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

Guru Careers: Finance Account Manager

£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas