Red Chip

What Is a Red Chip?

A red-chip company is one that does the majority of its business in China, and which the Chinese government has a considerable stake in the firm. Red-chips, however, are incorporated outside central area China and listed on the Hong Kong Stock Exchange. Red-chip stocks are thus expected to keep up with the filing and reporting requirements of the Hong Kong exchange. This makes them an important source for foreign investors who wish to take part in the fast growth of the Chinese economy.

Figuring out Red Chips

The name "red chip" may sound like "blue chip," however the two terms should not be confused. A large, notable, and financially stable company might be referred to as a blue chip. A distinguishing feature of a red-chip stock, in contrast, is a sizable Chinese government stake in the company. Red chips take their name from China's red flag, and the name mirrors the Chinese government's partial ownership of the company. Red-chip firms are not really large or notable.

Although red chips are listed on the Hong Kong Stock Exchange, they should not be confused with H-shares. H-shares are shares of companies that are incorporated in central area China yet traded on the Hong Kong Stock Exchange or another foreign exchange. Red chips, then again, must be incorporated outside central area China.

A red chip stock is not the Chinese rendition of a blue chip.

Benefits and Disadvantages of Red Chips

Red-chip stocks partake in a combination of great benefits, yet additionally have a couple of disadvantages. They offer access to the developing Chinese market, however their international incorporation and listing in Hong Kong guarantee adherence to developed market financial reporting standards. They additionally combine simple access for foreign investors and the discipline of global financial markets with implicit Chinese government backing.

Government support guarantees a generally friendly regulatory system and access to capital in a crisis. However, it additionally means that red chips might seek after objectives other than profit maximization. Like all companies, red chips work for the shareholders. However, the largest shareholders for red chips are in many cases Chinese state-owned enterprises. In theory, other shareholders might see profits set behind social, environmental, and other political objectives.

Requirements for Red Chips

According to FTSE Russell, there are four primary criteria for a firm to be classified as a red chip:

• Chinese government-partnered organizations must possess something like 30% of the company. These organizations might incorporate the government of the People's Republic of China, Chinese provincial governments, municipal governments in China, and Chinese state-owned enterprises.
• Over 55% of the firm's revenue must come from the People's Republic of China, or the firm must have more than 55% of its assets in China.
• The firm must be incorporated outside of central area China.
• The company's stock must be listed on the Hong Kong Stock Exchange.

It should be noticed that firms are not generally considered red chips assuming government ownership dips under 25%. Assuming both Chinese assets and Chinese revenue fall below 45%, the firm will likewise lose the red chip assignment.

Illustration of a Red Chip

China Mobile was the largest red-chip company as of May 2021, with a market capitalization of more than 1 trillion Hong Kong dollars (north of 125 billion U.S. dollars). The firm was incorporated in Hong Kong in 1997, so it is incorporated outside of central area China. The firm's shares are listed on the Hong Kong Stock Exchange, which is likewise a requirement for red-chip status. In December 2020, 72.72% of the company was held by China Mobile Communications Group Co., Ltd., which is a Chinese state-owned enterprise.

Highlights

• Red chips take their name from China's red flag, and the name mirrors the Chinese government's partial ownership of the company.
• Being a red-chip doesn't infer that such a company is large, stable, or mature.
• A red-chip company, however, conducts much of its business in central area China.
• Red chip firms are incorporated outside central area China and listed on the Hong Kong Stock Exchange.