When Margaret Thatcher and Deng Xiaoping signed the Joint Declaration on the handover of Hong Kong in 1984, big business in the colony effectively started packing its bags. By the time the tanks rumbled into Tiananmen Square in 1989, the old Hong Kong elite were practically rushing for the exits, diversifying their business interests via big investments in the UK or North America.
But when China finally assumed sovereignty over Hong Kong in 1997, everything had changed. Having been famously urged by one newspaper to "leave the baggage of Tiananmen behind", the city's business leaders had embarked on a love-in with Beijing that was almost embarassing to watch. It also led to a truly spectacular bubble in asset prices, one that went on even after the rest of Asia had succumbed to financial crisis.
Even in the early 1990s, China had already worked out that it could raise capital for state industries by floating minority stakes in Hong Kong. The first H-shares appeared in the early 1990s, with appropriately Communist-sounding names like Kunming Machine Tool Co, but initial enthusiasm soon fizzled out owing to the largely disappointing financial performance of such companies.
Then came red chips. The investment case for these was that they were domiciled outside China and run by ‘proper’ managers rather than Party apparatchiks. They were still majority-owned by state entities, though, and the idea was that these bodies would "inject" new assets into their listed offspring in return for shares.
The public went beserk. Betting on which company would be the next to be bunged a hotel or a highway became as commonplace as a night at the Happy Valley racecourse. Share prices soared. Soon, every provincial governor in China was looking for assets to cobble together into a vehicle that could be floated off in the land of plenty. Party-poopers weren’t welcome; when one regulator warned that Hong Kong was turning into "the Wild West of the East", he was effectively told to shut up by the government and the stock exchange.
Many of these red-chips were utter rubbish – disparate collections of unrelated assets run by bureaucrats, and delivering mediocre performance. And, eventually, the central government clamped down, such that many of the biggest red-chips in 1997 are no longer even in the red-chip index – which is now dominated by titans such as Sinopec and China Telecom.
For Hong Kong’s money-loving residents, it was fun while it lasted, but many were badly caught out by a collapse in share prices that was at least partly linked to changing political priorities on the mainland.
Jonathan Eley lived and worked in Hong Kong from 1995 to 1998.
