By Olivia Chung
HONG KONG - In a move to increase share supply to help deflate the Shanghai and
Shenzhen stock-exchange bubble, China's securities regulator has finalized
provisional rules for Hong Kong-listed red-chip enterprises to return home and
list on the A-share market. A-shares refer to those issued in
China by domestically listed firms for Chinese investors
A red-chip company is a China-invested enterprise incorporated and listed
overseas, mostly on the Hong Kong Stock Exchange, the business and net profits
being generated from mainland China. At present, most red chips are state-owned
or state-controlled enterprises.
The revised rules, which have made it easier for red chips to issue A-shares,
are part of the Chinese government's efforts to prevent the excessive-liquidity-caused
market bubble from growing by increasing share supply.
The China Securities Regulatory Commission (CSRC) has recently started
soliciting views from some securities companies on the revised rules for Hong
Kong-listed red chips wanting to issue A-shares, according to the Chinese
As red chips are not incorporated domestically, they are regarded as foreign
companies. As such they have so far been barred from launching A-share initial
public offerings (IPOs) at home as Chinese regulations forbid foreign companies
from going public on the A-share markets.
However, the revised rules now say: "It is now a ripe time to allow red
chips to issue (A) shares on the mainland; there is no major obstacle [and] it
But the rules are applicable to Hong Kong-listed red chips only. This is
because most of the red chips listed in the United States and Singapore are
privately run high-technology or Internet-related firms. Also, Hong Kong has
seen many successful cases of mainland-incorporated H-share companies returning
to the mainland stock market.
An investment banker said the CSRC consulted brokers about the revised rules
for a month.
"Following the usual practice, the CSRC will soon formally launch the
rules, and then the door for red chips to issue A-shares will officially
open," he said on condition of anonymity.
According to the draft rules, a red-chip company aiming to return to the
domestic market is required to have been listed on the Hong Kong stock exchange
for at least one year with a market capitalization of HK$20 billion (US$2.56
billion) or more, and to have made net profits of HK$2 billion or more over the
previous three years, with half of its business and net profits being generated
from the mainland.
The rules also allow a red chip to issue A-shares if its parent or subsidiary
firm is already listed on the domestic market.
Thus, under the new rules, China Overseas Land and Investment, a red-chip
mainland property developer, could follow through with its plans for an A-share
listing, although its parent, China State Construction Engineering Corp, aims
to issue A-shares next March. Last month, China Overseas Land chairman Kong
Qingping said it shelved the plan to sell shares to make way for the A-share
IPO of its state-owned parent.
Such requirements are aimed at attracting the return of large, good-quality
red-chip companies. Based on recent Hong Kong Stock Exchange data, of the more
than 90 red chips, about 20 qualify under such requirements, such as China Mobile,
CNOOC (China National Offshore Oil Corp), Bank of China (Hong Kong), China
Unicom, China Netcom, and China Merchants International. The total market
capitalization of these two dozen red chips is more than HK$2 trillion, with
the capitalization of China Mobile alone exceeding HK$1 trillion.
The market capitalization of A-shares on the mainland now is about 16 trillion
yuan (US$2.1 trillion) and it would increase by more than 10% with the return
of these red chips, which would bring in two trillion yuan.
Dai Tao, an analyst with Guotai Junan Securities, said the return of red chips
will bring profitable and well-managed companies to the mainland to help
improve the quality of the market and absorb excessive liquidity, which is the
root cause of the country's bull market.
Wu Xiaoqiu, director of Renmin University of China's Finance and Securities
Institute, said excessive liquidity has brought unprecedented opportunities for
China's capital market and for financial reform.
He said: "There are many issues in the country's capital market; apart
from stabilizing the market and boosting investors' confidence, the market's
structure needs to be improved by adding big-cap H-shares and red chips in the
Regarding the impact on the shares of red chips in Hong Kong, given that their
offerings in the A-share market are always priced at a discount to the shares
of red chips, the latter will usually become targets of short-term speculation.
Hu Weitao, chief analyst at United Securities, said the authorities' plan to
bring back red chips showed that they prefer increasing the share supply to
cool the red-hot A-share markets to directly intervening in the market.
Fan Gang, a People's Bank of China monetary policy committee member and head of
the National Economy Research Institute, and CSRC chairman Shang Fulin last
month on separate occasions indicated that the regulator would like to see the
market mechanism adjusted to correct the imbalance between the demand and
supply of shares.
However, Wu said Beijing is encouraging the return of H-shares and red chips,
but the success of the move still depends on the initiatives of these
"Given that these companies have gone through a strict review process
before listing overseas, they still have to deal with the Chinese regulatory
authorities, which are different from their Hong Kong counterparts," he
Wang Xiaochu, chairman of China Telecom, a mainland fixed-line network
operator, said earlier that the company would probably not sell shares in the
country's A-share market until its mobile and Internet television business
prospects become clear.
Although some red chips seemed to have reservations about the plan to issue
A-shares, others have indicated that they are planning to list on the mainland
CNOOC, mainland China's biggest offshore oil producer, will be among the first
batch to sell A-shares if Chinese regulators approve plans by red chips to do
so, chairman Fu Chengyu said at the company's annual general meeting in Hong
Kong last month.
Besides CNOOC, the world's largest wireless carrier, China Mobile, and the
world's third-largest personal-computer maker, Lenovo Group, are among the
companies likely to take part in the pilot scheme.
Mainland conglomerate Beijing Enterprises Holdings, the investment arm of the
municipal government of China's capital, is considering listing shares
domestically, possibly next year, said chief executive Zhang Honghai.
Copyright 2007 Asia Times Online Ltd.
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