RED-CHIP CONGLOMERATES, the forgotten darlings of Hong Kong's stock market, are being urged to restructure quickly as China's business landscape changes.
Once feted for their superior mainland connections, or guanxi, red chips face mounting questions over their relevance as China prepares to open its economy further to foreigners following its entry into the World Trade Organisation last month.
'The red chip companies were the spoiled kids of investors in the mid-1990s,' said Keith Li, associate director of Daiwa Institute of Research. 'But now interest in the counters is fading.'
Red chips are companies incorporated and listed in Hong Kong, but controlled by Chinese state-owned organisations or government bodies.
Investors in the 1990s were attracted to these 'window' companies of municipal governments or ministries, figuring their strong relationships with the mainland would translate into lucrative business opportunities.
The parents of red chips helped to feed these expectations by injecting assets into the Hong Kong-listed vehicles at supposedly bargain prices, a process that raised red chips' earnings per share and fuelled hopes of further acquisition-driven growth.
Asset injections and general investor enthusiasm for China culminated in the red chip boom of 1996-97, during which many red-chip shares were driven to giddy heights. But after the bubble was burst by the onset of the Asian financial crisis, they have failed to regain their lustre and risk being eclipsed by the promised level playing field of WTO.