Definition, characteristics, and representation of red- chip stocks
· What are red-chip stocks?
In addition to A and B shares issued by state-owned enterprises, another important category of Chinese concept stocks is "red-chip stocks." Red-chip stocks refer to shares issued by companies that are predominantly focused on mainland China in terms of business, assets, market, and ownership. These companies are listed in Hong Kong and are considered Chinese-funded enterprises. Red-chip stocks are not registered and established in mainland China, and their share values are denominated in currencies other than the Chinese yuan. A significant distinction between red-chip stocks and domestically listed state-owned enterprises is that red-chip stocks issue only circulating shares (unlike state-owned enterprises that divide their share capital into different categories) and do not differentiate between "domestic shares" and "foreign shares."
As the category of red-chip stocks is not officially established or legally defined, the issuance and trading methods of red-chip stocks are similar to those of other listed companies in Hong Kong.
· Advantages and disadvantages of red-chip stocks
Advantages:
1. Investment opportunities
Red-chip stocks are listed on the Hong Kong Stock Exchange, providing Hong Kong investors with opportunities to participate in global markets. Since these companies' primary operations are overseas, investors can benefit from global economic growth and opportunities in other country markets through investments in red-chip stocks.
2. Local advantage
Red-chip stocks are typically mainland Chinese enterprises listed on the Hong Kong Stock Exchange, making it easier for Hong Kong investors to understand and evaluate their business models and growth prospects.
3. Benefiting from China's economic development
Red-chip stocks are often closely linked to the economic development of mainland China, allowing them to benefit from China's economic growth opportunities.
Disadvantages:
1. Influence of policy risks
As red-chip stocks are predominantly Chinese companies, they may be significantly affected by policy adjustments or regulatory changes in China, such as trade disputes or changes in industry regulations.
2. Lower level of internationalization
Compared to H-shares, which have a higher level of international recognition, red-chip stocks have lower visibility and acceptance in international markets, potentially limiting their appeal to international investors.
3. Market volatility risks
Red-chip stocks are subject to global economic and financial market fluctuations, particularly influenced by factors such as China-US trade relations and geopolitical situations, which may expose them to significant market volatility risks.
· Some representatives of red-chip stocks
|
Stock name |
Stock code |
Explanation |
|
China Mobile |
00941.HK |
In January 27, 1998, it became a constituent stock of the Hang Seng Index in Hong Kong. Its main business covers voice, data, broadband, dedicated line, IDC, cloud computing, IoT, and other services for individuals, families, government-enterprise, and emerging markets. It is the largest communication and information service provider in mainland China, as well as one of the world's leading communication and information operators in terms of global network and customer scale, profitability, and brand value. |
|
CIADY |
02319.HK |
With its main brand, Mengniu, it has become one of the leading dairy product manufacturers in China. As of the end of December 2020, the group's annual production capacity of dairy products reached 9.9 million tons. In March 2014, Mengniu was included in the Hang Seng Index constituents, becoming the first Chinese dairy company blue chip stock, and was selected into the Hang Seng Sustainable Development Enterprise Index and the Hang Seng ESG50 Index in August 2020. |
|
CNOOC |
00883.HK |
It is China's largest offshore oil and gas producer and one of the world's largest independent oil and gas exploration and production companies, mainly engaged in exploration, development, production, and sales of crude oil and natural gas. |
|
BEIJING ENT |
00392.HK |
Its main business covers urban gas, urban water, solid waste treatment, and other public utilities, as well as investment in consumer goods business including one of the largest domestic beer enterprise groups and Asia's largest beer producer, Yanjing Beer. |
|
CHANA RES LAND |
01109.HK |
It is a business unit under China Resources (Holdings) Co., Ltd., a Fortune Global 500 company, responsible for urban construction and operation. It is the most influential urban investment development and operation enterprise in the industry, constructing a '3+1' business model integrating 'development and sales-oriented business, operational real estate business, light asset management business' with organic linkage of ecological circle elements. |
（Source：stock.qianzhan.com，2024.05,10）
Definition, Characteristics, and Representatives of H-shares
· What are H-shares?
Also known as Red Chip shares, they are foreign-currency-denominated shares issued by companies registered in Mainland China, primarily listed in Hong Kong and traded in Hong Kong dollars.
H-share companies must comply with additional regulations set forth by the Main Board or Growth Enterprise Market (GEM) Listing Rules of the Hong Kong Stock Exchange. These regulations include: (a) Annual accounts must comply with either Hong Kong or international accounting standards; (b) Articles of association must contain provisions reflecting the different nature of domestic shares and foreign shares (including H-shares) and the different rights of holders; (c) Articles of association must contain provisions providing investors with protections equivalent to Hong Kong standards. Apart from these additional regulations, the listing process and trading mechanisms of H-shares are generally similar to other stocks in Hong Kong.
Investors should note that the opening of the B-share market does not mean the opening of the H-share market to domestic residents. The B-share market and H-share market remain completely separate. State-owned enterprises that have issued B-shares cannot simultaneously issue H-shares, and vice versa. However, state-owned enterprises can simultaneously issue A-shares and H-shares.
· Advantages and Disadvantages of H-shares
Advantages:
1. High degree of internationalization
H-shares are listed in Hong Kong, making it easier to access international capital and international investors, facilitating the company's expansion in the international market.
2. Better liquidity
Due to the relatively mature Hong Kong stock market compared to the A-share market, H-shares generally have higher liquidity, making it easier for investors to buy and sell stocks.
3. Stable regulatory system
The Hong Kong Securities and Futures Commission regulates listed companies relatively strictly, providing a more stable and reliable regulatory environment, conducive to protecting investors' rights.
4. More open capital market
As an international financial center, Hong Kong has a more open capital market, attracting more foreign investors to participate and providing companies with broader financing channels.
Disadvantages:
1. Affected by exchange rate fluctuations
H-shares are denominated in Renminbi but traded in Hong Kong dollars, thus being affected by fluctuations in the Renminbi to Hong Kong dollar exchange rate, potentially increasing investment risks.
2. Political risk
Due to the political relationship between Hong Kong and Mainland China, H-shares may be affected by geopolitical risks, such as the uncertainty caused by the social unrest in Hong Kong in 2019.
3. Different legal environments
Hong Kong and Mainland China have different legal systems, requiring H-share companies to comply with different laws and regulations in both regions, increasing the complexity of corporate management.
4. Affected by global economic conditions
As part of the international market, H-shares are more susceptible to the impact of global economic conditions, such as global financial crises or geopolitical tensions, which may affect the H-share market.
- Some representatives of H-shares
|
Stock name |
Stock code |
Explanation |
|
SINOPHARM |
01099.HK |
Under its umbrella are two A-share listed companies, China National Pharmaceutical Group Corporation (Sinopharm Group, 600511.SH) and China National Accord Medicines Corporation Ltd. (Sinopharm Accord, 000028.SZ), with over a thousand subsidiary companies. It has now become a leading distributor and retailer of pharmaceuticals, healthcare products, and medical devices in China, as well as a leading provider of supply chain services. |
|
BYD COMPANY |
01211.HK |
BYD's business covers electronics, automobiles, new energy, and rail transit, playing a significant role in these fields. It comprehensively constructs zero-emission new energy solutions, from energy acquisition and storage to application. BYD is listed in Hong Kong and Shenzhen, with both its revenue and total market value exceeding hundreds of billions of yuan. |
|
BANK OF CHINA |
03988.HK |
It is the longest-operating bank in China and the most globally and comprehensively integrated bank. With institutions in 62 countries and regions within mainland China and overseas, Bank of China, along with its branches in Hong Kong and Macau, acts as the local note-issuing bank. Bank of China has a relatively comprehensive global service network covering investment banking, direct investment, securities, insurance, funds, aircraft leasing, asset management, financial technology, financial leasing, and other fields. |
|
CHINA LIFE |
02628.HK |
As a leading enterprise in the domestic life insurance industry, headquartered in Beijing, it is a core member of China Life Insurance (Group) Company, listed on the Fortune Global 500 and World Brand 500. With its long history, strong strength, professional leading competitive advantages, and world-renowned brand, the company has won the trust of a wide range of customers and has always maintained a leading position in the domestic life insurance market. |
|
CHINA VANKE |
02202.HK |
As a leading urban and rural construction and living service provider in China, the company focuses its business on the three most dynamic economic circles in the country and key cities in the central and western regions. In addition to consolidating its advantages in residential development and property services, its business has expanded into commercial real estate, long-term rental apartments, logistics warehousing, hotels and resorts, education, and other fields. |
（Source：stock.qianzhan.com，2024.05,10）
Differences between Red Chip Stocks and H-Shares
1. Different places of registration: Although Red Chip stocks are also listed in Hong Kong, they are fundamentally different from H-Shares. H-Shares represent foreign stocks registered in mainland China and listed in Hong Kong, which are essentially mainland companies. Red Chip stocks are registered and managed overseas, belonging to companies based in Hong Kong or overseas.
2. Differences in share liquidity: All shares of Red Chip stocks can be publicly traded, while some shares of H-Shares may not be publicly traded.
3. Differences in secondary market refinancing capabilities: When issuing new shares, Red Chip stocks may have more flexibility and space, while the risks of H-Share issuance may be higher, and the time may also be relatively longer.
4. Differences in feasibility of returning to the domestic stock market: H-Shares can directly apply for an IPO in the domestic stock market, while the possibility of Red Chip stocks returning to the A-share market is lower.
5. Different approval procedures: When issuing convertible bonds and other bonds, Red Chip companies do not need to comply with mainland legal procedures and conditions, while H-Share companies need to comply with mainland legal procedures and conditions and obtain approval from relevant national departments.
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