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China: Gambling with red chips

Red-chip mania in Hong Kong reached new heights last month with the listing of Shum Yip Investment, the commercial investment arm of the Shenzhen municipal government.

Shenzhen is a Chinese boom town just over the border from Hong Kong and red chips are Chinese companies listed on the Hong Kong stock market.

The heavily oversubscribed offer was priced at HK$1.85 (US$0.24) a share. By the closing bell, the stock had risen 144.59% to close at HK$4.525. Trade in the share outstripped all the other stocks, with just over HK$1 billion of the scrip exchanged, HK$205 million more than for HSBC Holdings.

Though it seems like madness, there was method in the frenzied activity. Investors were relying on Shum Yip to follow in the gold-paved path of its Shanghai equivalent, Shanghai Industrial Holdings (SIH). This listed last May at HK$7.28 a share, and the price has since risen to around HK$35. SIH's success, in turn,

rests on that of the much more established red chips, such as Citic Pacific, the Hong Kong listed vehicle of the China International Trust and Investment Corporation, which is effectively the investment vehicle of the central government.

Citic Pacific dates back to 1990, when the parent acquired a local listed company.

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