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Just five months ago, Hong Kong investors stood in line to buy into the latest hot ''red-chip'' stock offering--a sale of shares in Beijing Enterprises Holdings Ltd.

Amid hopes that China's capital city would soon sell the conglomerate choice municipal assets at bargain prices, Beijing Enterprises' shares soared. But the sales haven't materialized--and the investment climate in Hong Kong has soured quickly as Southeast Asia's financial crisis has deepened. All of a sudden, the red-chip bulls have become raging bears. Since its August high of $8.20, Beijing Enterprises' stock price has plummeted 60%.

Other red chips--companies controlled by mainland interests but listed in Hong Kong--are also hitting the skids. Hong Kong's market is reeling, but damage among red chips is worse. The Hang Seng red-chip index has lost half its value in the past two months (chart). ''This is well beyond a consolidation and well into a crash,'' says Kent Rossiter, senior investment adviser at Nikko Securities (Asia).

In addition to Beijing Enterprises, another major victim of the crash is China Telecom (Hong Kong) Ltd., a mobile-phone network operator controlled by China's Ministry of Posts & Telecommunications. Despite an effort to whip up support for the carrier's Oct. 22 initial purchase offering in Hong Kong and overseas, the issue flopped as soon as trading began. On the New York Stock Exchange, China Telecom American depositary receipts fell to $28.50, 6.6% below their $30.50 IPO price.

A red-chip wipeout is bad news for President Jiang Zemin and his economic guru, Vice Premier Zhu Rongji, who are relying on Hong Kong investors to fund many of their private-sector-oriented reforms. A prolonged downturn in the market would cut the amount of cash flowing into China deals. That could make it harder to restructure China's state industries.

Prior to the June 30 handover of Hong Kong to Beijing, owning shares in a red chip seemed a license to print money. After setting up shop in Hong Kong, a red chip would typically snap up state-owned assets on the cheap, hoping to turn big profits once they were restructured. The promise of such asset injections drove red chips' valuations to ''ridiculous levels,'' says Robert Rountree, managing director of regional research at Nomura International (Hong Kong) Ltd. At its peak, Beijing Enterprises had a price-earnings ratio of 90. Even now, red chips are trading at 25 times estimated 1998 earnings.

Some analysts believe Beijing has too much at stake not to bail out the red chips. To boost interest in China Telecom, Posts & Telecommunications Minister Wu Jichuan has promised more asset injections. Executives from other top red chips are lobbying Beijing for other state assets. Meanwhile, a few brave investors are moving back into such beaten-down quality red chips as China Resources Enterprises Ltd., backed by the Foreign Ministry, and Shanghai Industrial Holdings Ltd., controlled by Shanghai's city government. But as Asia's markets continue to sink, even a policy change in Beijing won't do much to bring back red-chip fever.

By Bruce Einhorn in Hong Kong, with Kerry Capell in New York

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Updated Oct. 23, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.
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