In general, stocks referred to as red chip stocks are stocks of mainland China companies incorporated outside mainland China and listed on the Hong Kong Stock Exchange. The term red chip stock is a play on the expression blue chip stock. Red is a color strongly associated with China, due to a combination of the color’s prominence in traditional Chinese culture and its more modern connection to communism.
The Hong Kong Sock Exchange permits foreign investors to purchase stocks. It is important to keep in mind however that even though the companies are incorporated outside mainland China they are still based in mainland China and subjected to the laws of mainland China. Directly or indirectly, most of the red chip companies are controlled by the Chinese ruling party.
If you want to find China-affiliated stock companies to invest in, the Hang Seng China-Affiliated Corporations Index is a good place to start your hunt. At the time of writing, these are the 25 companies included in the index:
|Beijing Enterprises Water Group|
|Brilliance China Auto|
|China Everbright International|
|China Merchants Holdings (International)|
|China Resources Cement|
|China Resources Enterprise|
|China Resources Gas|
|China Resources Land|
|China Resources Power|
|China Taiping Insurance|
|CSPC Pharmaceutical Group|
|Shanghai Industrial Holdings|
Examples of other Chinese shares
The Chinese government restricts foreign ownership of shares in Chinese companies that are listed on the Shanghai Stock Exchange and traded in Renminbi (CNY). On the Shanghai Stock Exchange you will also find Chinese companies that are traded in USD, and these shares may be purchased by foreigners. These shares are formally known as Domestically Listed Foreign Investment Shares. Domestically Listed Foreign Investment Shares are also available on the Shenzen Stock Exchange, where they are traded in HKD and available to foreign investors.
Shares in companies that have their business operations in mainland China but are incorporated abroad and listed on the London Stock Exchange are commonly referred to as L-shares. They are usually incorporated in the British Virgin Islands, Cayman Islands, Jersey , or Bermuda.
Shares in companies that have their business operations in mainland China but are incorporated abroad and listed on NYSE, NYSE MKT or NASDAQ are commonly referred to as N-shares. They are usually incorporated in the British Virgin Islands, Cayman Islands, Bermuda, Nevada (USA) or Delaware (USA).
Shares in companies that have their business operations in mainland China but are incorporated abroad and listed on the Singapore Stock Exchange are commonly referred to as S-shares. They are usually incorporated in Singapore, British Virgin Islands, Cayman Islands, or Bermuda.