Hong Kong Investors Deep in the Red, and Thrilled

Ask a Hong Kong investor whether he prefers stock in a solid blue-chip company or in a company controlled by the communist Chinese government.

The answer may surprise you.

While other countries are rushing to privatize state-owned enterprises, China has taken a different approach. It is going to the most capitalist of institutions - the stock market - to raise funds for its national industries.

And Hong Kongers are tripping over each other to buy shares.

The companies are called "red chips" - based in China but traded in Hong Kong.

And the red chips are red hot with the approach of June 30, when Britain hands the colony back to China.

One example: the public offering of Beijing Enterprises, dubbed "Beijing Inc."

This red chip, the investment arm of Beijing's municipal government, owns China's largest brewery, a highway, and a 50 percent stake in Beijing McDonald's.

And when the company announced it would sell stock shares for the first time, 1 in every 15 Hong Kong adults wanted a piece, but only about 3 percent of the applicants received shares.

Demand was such that short-term interest rates rose as many potential investors borrowed heavily to invest.

The stock's opening price on the Hong Kong market, May 29, was 200 times the issue price, and it soared another 37 percent over the next three trading days.

With the return of Hong Kong to China, local investors believe the strategy for the future is the ancient tradition of guanxi (gwong-shee) - personal relationships. Companies with good guanxi in China will prosper in Hong Kong.

"[People are] saying go where the deals are, go where the connections are," says Howard Gorges, director of South China Brokerage Hong Kong. "The playing field doesn't have to be tilted against others, but it certainly is tilted in favor of some."

"The man in the street understands that such and such a company is very well connected with the ministry of something or another in Beijing," adds Stuart Leckie, chairman of Fidelity Asia-Pacific, "and that it is likely that they're going to do lots of business, get planning permission for something, just be a profitable company."

Beijing Enterprise officials are not shy about flaunting their political clout.

"Beijing Enterprises has established a very close relationship with the Beijing municipal government," the company said in a statement on the eve of its market debut. "This will place Beijing Enterprises in a better position in identifying lucrative investment opportunities."

Investors also expect such Chinese parent companies to transfer profitable assets to their Hong Kong-listed subsidiaries.

Many such "asset injections," so far, have come at bargain basement prices. But the appetite for red chips is so strong that investors no longer insist on "friendship prices," as long as such deals appear likely.

Some analysts call the whole red-chip concept a Chinese success story - drawing foreign capital into China and boosting Hong Kong's market at a sensitive time.

"I think red chips are certainly helping the overall sentiment in the market," Mr. Gorges says.

The last thing China's leaders wanted ahead of the handover was a sagging stock market, indicating investors were not confident in the territory's future under Chinese rule.

Instead, the market's main barometer, the Hang Seng Index, sits at record levels, and investors snap up shares in any company with strong China links.