Red chips reach new highs in Hong Kong

Clifford German on the economy post-handover

The Hong Kong stock market has passed its first test of confidence since the handover to Beijing this month. The Hang Seng index hit a new high for the year this week in hectic trading, topping the previous high achieved on 27 June. The traditional blue-chip stocks are performing well. The red chips, the companies effectively controlled by the mainland, did even better.

Investors in the Hong Kong market have held their nerve as well as the inhabitants of the territory during the handover to China, although investors have at least had the option of cutting and running. Specialist unit trusts and investment trusts report no real rush to disinvest in spite of the sight of Chinese armoured personnel carriers entering the territory.

One reason for the strength of the Hong Kong market has been the relatively poor performance of other Far Eastern markets this year. Taiwan and Indonesia are doing well but markets in Malaysia, Singapore and Thailand have fallen 15-20 per cent in the past six months, and in the Philippines shares are down by an average 30 per cent.

Not all sectors have prospered. The property sector has been ignored because it is vulnerable to a worldwide rise in interest rates led by the US, and also because the new rulers of Hong Kong are committed to releasing more land to hold downprices. The banking sector, by contrast, has performed strongly although this is partly due to the strength of shares in the Hongkong & Shanghai Bank, which is also quoted in London, allowing the insatiable demand for bank shares in London to spill across into the Hong Kong market.

It is generally assumed that the Hong Kong economy stands to benefit from an increased flow of trade and investment with mainland China.But the main factor favouring Hong Kong remains the strong demand for red chips, the companies controlled by banks, ministries and municipalities based in mainland China. Companies such as China Resources, Citic, Beijing Enterprises and Shanghai Industrial have seen their shares rise by up to 50 per cent over the past three months. These institutions have been transferring assets to red-chip Hong Kong companies at relatively low prices in return for Hong Kong dollars or increased shareholdings.

In economic terms this may not matter, since effective control remains in the hands of the mainland authorities. But the flow of assets has been noticed by the China Securities Regulatory Commission, which suspects that assets are being transferred too cheaply or that some of the proceeds of the sales are being syphoned off into unauthorised accounts. At worst it could be part of the spread of institutionalised corruption from mainland China to Hong Kong.

The appointment of a new boss for the CSRC could be the start of a crackdown. But analysts are inclined to believe the flow of assets means Hong Kong is entrenching itself as the main capital market for mainland Chinese companies and guaranteeing its future prosperity.