New rules for red chips listing on
mainland 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 media.
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 is viable."
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 market."
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 companies.
"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 said.
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 stock market.
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.
Olivia Chung is a senior Asia
Times Online reporter.
(Copyright 2007
Asia Times Online Ltd. All rights reserved. Please
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