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Red Chip Listings Threatened By New Rules

by Mary Swire, for LawAndTax-News.com, Hong Kong

12 September 2006


Chinese 'red chip' listings are threatened by new rules which came into effect last week to control abuse of the restructuring process needed to transfer assets into offshore control.

A 'red chip' share is formed when a Chinese company transfers its assets into the ownership of an offshore holding company, typically in the Cayman Islands or the British Virgin Islands, prior to a listing in Hong Kong or New York. Historically there has been little control over the process, allowing Chinese owners to sell assets to the offshore companies at artificially low prices, encouraging capital flight.

The new regulations cover the valuation of assets to be transferred, and permission for each issue will have be given by the Ministry of Commerce. Brokers and issuers fear that if the rules are applied retrospectively, whether to already listed stocks, or to those in the issuance pipeline, there will be delay and confusion in the markets.

The new rules also seek to control the use of the proceeds of a red chip issue by requiring listed companies to repatriate funds obtained through listing and to report on the process to the State Administration of Foreign Exchange.

The proposed flotation of Industrial and Commercial Bank of China, which promises to be the biggest-ever IPO, later this year, will not be affected by the new rules, since it is an 'H-share' issue, with ownership of the company remaining on the mainland.


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