DEFINITION of Red Chip
A red-chip company is one that is based in Mainland China but incorporated internationally and listed on the Hong Kong Stock Exchange. Red-chip stocks are expected to maintain the filing and reporting requirements of the Hong Kong exchange, which makes them a main outlet for foreign investors who wish to participate in the rapid growth of the Chinese economy.
Red chips may be issued in addition to A-shares in the same companies, although only Chinese citizens can invest in A-shares.
BREAKING DOWN Red Chip
Over 30 red chip stocks (a reference to the color of China's flag) make up the Hang Seng China-Affiliated Corporations Index.
As of June 2018, the index consisted of:
The above companies are in order of highest to lowest volume of trades.
As a sign of the pent-up demand among mainland Chinese citizens for Chinese stocks, the A-shares they are permitted to invest in often have significant premiums compared to red chips for the exact same companies.
Red Chip and the Hong Kong Stock Exchange
The Hong Kong Stock Exchange (HKG) is a member of the HKEX Group and the leading venue for capital raising activity for Hong Kong and Mainland Chinese issuers. The exchange traces its origins to the founding of China's first formal securities market, the Association of Stockbrokers in Hong Kong, in 1891. A second market opened in 1921, and in 1947, the two merged to form the Hong Kong Stock Exchange. Today, the Hong Kong Stock Exchange is of the world's largest securities markets by market capitalization.