Red-Hot Record

HONG KONG

Bullish investors registered a climactic vote of confidence in Hong Kong’s future by pushing the benchmark Hang Seng stock index to a record high of 15,196.79 points on Friday, the last day of trading under British rule.

Red chips, the Hong Kong companies with strong mainland-China connections, were the darlings of the Hong Kong stock market as the China-Affiliated Corporations Index surged 224.63 points to 3,469.32, its largest gain to date.

Few analysts were surprised by the market’s behavior given the two weeks of frenetic trading leading up to Friday’s close, particularly the buying up of companies that are expected to benefit when the longtime British colony returns to mainland Chinese control on Tuesday.

“This hasn’t been much different from any other day with red chips leading the way,” said Peter Bristowe, head of sales at ABN AMRO Hoare Govett Asia, a Hong Kong investment company. “It’s been one-way traffic for the last 10 days.”

Indeed, there were few surprises during the market’s final hours, which were transformed into yet another media-orchestrated drama in a week of historic hoopla.

Stock market officials attempted to downplay the event, allowing about 100 reporters and photographers to watch the market’s final hour but refusing to answer any of their questions after the trading was over.

“It is just business as usual,” Robin Barrie, a consultant to the stock market, told frustrated reporters.

Others, however, saw the moment as bittersweet. Said a trader who works for a British firm: “It’s been a great day, but we’re a little bit nostalgic.”

The growing influence of red chips on the Hong Kong exchange, the seventh-largest in the world and the second-largest in Asia, mirrors the change rippling through Hong Kong as the power shifts from Britain to China.

“If you look at the blue chips [the traditional British-dominated stocks], they were rather flat,” said Gary Ho, managing director of Comprador GHK Ltd., a Hong Kong-based investment firm. “The market is really looking at these big red-chip companies.”

Ho, like many other market watchers, is confident that major China-connected players such as container operator Cosco Pacific, China Resources Enterprise and China Merchants Hai Hong Holdings, all winners in Friday’s trading, will flourish in a post-1997 Hong Kong whose future is increasingly dependent on the fortunes of its giant Communist neighbor.

Analysts said the Hong Kong market will remain sensitive to U.S. interest-rate changes since the Hong Kong dollar will still be tied to the U.S. currency after the hand-over. But they also expect the market to reflect political and economic events in China more closely, given the dramatic flow of money both ways across the border.

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For example, the Chinese government’s recent efforts to tighten regulation of the Shenzhen, Shanghai and Guangzhou stock exchanges has sent more mainland Chinese money into Hong Kong, according to Nerissa Lee, an investment director at Guinness Flight Asia Ltd., an investment management firm.

Lee dismissed rumors that the Chinese government was pumping money into the Hong Kong market to give it an artificial boost before taking control.

“The market capitalization is so big now, it would be very difficult for anybody to try to manipulate the market, and it would be very stupid to do so,” she said.

There are a few dark clouds on the market’s horizon. Some fear that the red-chip fever has gotten out of hand, causing people to pump money into speculative ventures whose only selling points are mainland Chinese assets of questionable value.

“At the moment, there’s quite a lot of greed in this market,” said Royce Brennan, managing director of Guinness Flight Asia Ltd. “But even if this market comes down a bit, it is well-supported by the fundamentals.”

Meanwhile, incoming Hong Kong Chief Executive C.H. Tung is expected to release a housing policy next week aimed at curbing property speculation and creating more affordable real estate. That could have a big impact on the market--about 60% of the companies on the Hang Seng index are heavily involved in the property market.

The Hong Kong Stock Exchange will be closed for five days to mark the hand-over, the longest break since the market was shut down after the Black October crash in 1987. When the market reopened that time, share prices plummeted.

No one expects that ugly scene to be repeated this time. Most analysts expect the market to continue climbing.

“I’m really bullish,” Ho said. “I think we will see the trading volume in the market go from [$3.4 billion] to well over [$3.9 billion] in short order.”

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What Hong Kong?

The last day of stock trading in Hong Kong under British rule sent the key Hang Seng index to a record high. The so-called “red-chip” index, made up of companies with mainland China ties, has been rising even faster. Hong Kong reverts to China on July 1, and the Hong Kong exchange reopens July 3 under Chinese control.

HANG SENG INDEX

Friday close: 15,196.79

RED-CHIP INDEX

Friday close: 344.14

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* Source: Bloomberg News