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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

INVESTOR's POKER?

The euphoria over "red chips" can be dangerous


SOME CORRECTIVE ACTION WAS clearly due. Driven by investor enthusiasm for "red chips," or China-backed companies, Hong Kong's Hang Seng stock index had recently broken record after record. When it rose 4.5% in a single day last week, Beijing itself decided to act by administering the first dose of medicine for a speculative fever that was threatening to do lasting damage beyond the portfolios of high-flying investors. The dampener: restrictions on both mainland assets transferable to Hong Kong-listed red chips and new public offerings by such corporations.

Those toting up their paper profits from the past few months may complain about China's seemingly sudden move. But it was clear that a sizable measure of self-delusion was fueling the frenzied bidding for red-chip stocks. The speculators would do well to heed the admonition of renowned American investor Warren Buffett that "any player unaware of the fool in the market probably is the fool in the market." Certainly, foolishness was evident in Hong Kong several weeks ago from the long queues of taxi drivers and other dabblers who, in their zeal to buy into the initial public offering of Beijing Enterprises Holdings, put down deposits exceeding the combined foreign reserves of Russia, Australia and New Zealand. And how else to explain the outlandish price -- more than 1,000 times 1996 per-share earnings -- being paid for stock in China Everbright-IHD Pacific, a company that is believed to have lost $13 million over the past year?

What prompted such euphoria? Though red chips may be a sound long-term investment, many recent investors were basically playing stock-market poker. They hope the mainland firms, with their links to Chinese authorities, will be gifted with easy asset injections and market advantages regardless of how well they are run. Such an assumption ignores two realities: political favor can be withdrawn, and government officials do not have inspiring records in business management.

It is the right of individual investors to do what they want with their money. But China has larger interests to protect -- including Hong Kong's. The country needs to attract foreign investment to fuel economic development, yet the casino atmosphere and sky-high valuations are beginning to make some would-be overseas investors nervous. Politically, Beijing fervently wants its repossession of Hong Kong to be successful, especially to serve as a model for reunification with Taiwan. Chinese leaders are all too aware that, if the speculative bubble were to burst on the heels of the July 1 handover, it would be a pop heard around the world. Detractors could point to a shriveled Hang Seng index as evidence that "all the fears" about China's takeover were materializing.

Regulators in both Beijing and Hong Kong should take additional steps to safeguard the latter's stock market. Currently, the true financial positions of China-backed companies are murky because of skimpy disclosure requirements. The red chips must be subjected to the same rules as Hong Kong companies, as modern, fair and efficient markets demand that information be available to everyone at the same time. Otherwise, the vacuum will continue to be filled by rumor and guesswork -- and red chips may become the investing equivalent of poker chips.


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