China Interests Snap Up Firms in Hong Kong

China’s giant state-owned enterprises are snapping up control of Hong Kong companies at a feverish rate, but that has left the mainland’s own fledgling bourses to vegetate, analysts said.

“The drawback of all this activity in Hong Kong, from China’s perspective, is that it does illustrate profound disillusionment with their own B share market,” said Crosby Securities research director Archie Hart.

In the latest takeover, announced last week, China Aerospace Industrial Corp., which manufactures and launches satellite-carrying rockets, said it has taken control of Hong Kong electronics and plastics group Conic Investment Co. by paying $29.9 million for a 51% stake.

Mainland Chinese interests now have control of 19 Hong Kong-listed companies with a total market capitalization of about $9 billion, up from only 14 companies and $5 billion just three months ago, according to Dao Heng Securities research manager Alex Tang.

But while the Hong Kong stock market has prospered, China’s own share markets have stagnated.

The total capitalization of B shares--which are restricted to foreign ownership only--on China’s Shanghai and Shenzhen markets is only about $1.05 billion.

Foreign investors have lost patience with substandard earnings reports and a tangle of regulations that have yet to be sorted out, analysts say. And, perhaps more important, China stocks on the mainland are trading at price-earnings ratios much higher than the red chips in Hong Kong.

But if China’s best corporate entities continue to bypass the B share markets, it will create a vicious circle, analysts say.

“There is absolutely no reason to go up to China and enter the minefield there when you can buy pretty well-regulated companies down here for half the price,” said Clive Weedon, head of the Nomura Research Institute in Hong Kong.