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What is a Red Chip?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Images By: Daboost, Leungchopan, Franck Thomasse, Jorge Láscar
  • Last Modified Date: 10 November 2016
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A red chip is a company that is based in mainland China but is incorporated outside the mainland and is listed in Hong Kong. This means that any red chip shares of stock issued by that company must meet the standards set by the Hong Kong exchange. Stock options of this type are often attractive to foreign investors who are interested in benefiting from the growth of China’s economy. The designation of the stock option as red is a reference to the People’s Republic of China and the presence of the Communist Party in that nation.

In most instances, a red chip company is controlled in some manner by the government or a government entity of the Republic of China. The control may be direct, possibly controlled by a specific department within the national government. At times, the control is indirect, routed through a number of other entities. This indirect control may be managed through various organizations or other businesses that are owned by the state, a province, or even a municipality within the nation.

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Red chip stocks are part of the Hang Seng Index, an index that experienced a great deal of growth during the first ten years of the 21st century. In addition to issuing these types of stocks, the company may also issue A-shares that are available to Chinese citizens. Since only Chinese citizens may purchase the A-shares, the premiums offered on those stocks are very competitive with red chip or any other stock options offered by the mainland China-based companies and traded on various exchanges. Doing so makes it possible for Chinese nationals to enjoy many of the same financial rewards afforded to foreign investors who buy the red chip stock options.

The creation of red chip stocks makes it possible for investors who are not citizens of China to participate in the economic growth of that nation. Investors from around the world may access these stock options via the Honk Kong exchange, where the currency used to trade the shares can be converted from any foreign currency to Hong Kong Dollars (HKD). This approach can be especially rewarding during periods when other nations are experiencing some type of economic downturn like a recession, and the Chinese economy remains somewhat strong and unaffected by the downturn. In recent years, some investors have found that holding at least some red chip stocks make it possible to offset losses from other investments, and keep the overall worth of a portfolio within an acceptable range.

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