New rules threaten red chips

Regulations due to take effect on Friday governing the transfer of Chinese assets to overseas shell companies could derail the markets if they are applied retroactively to red chip companies, bankers fear. There is widespread concern that prospective red chips – foreign, usually Hong Kong, incorporated firms controlled by mainland shareholders – already locked in listing preparations will have to go through the restructuring process all over again in order to comply, the South China Morning Post reported. The new rules deal with the valuation of assets intended for sale to offshore entities, a controversial topic as firms' senior managements have in the past been accused of valuing the assets cheaply and then selling them on to foreigners at a huge profit. Capital flight will also be addressed with firms that plan on listing shares abroad having to first inform the currency regulator how the proceeds will be returned to the mainland within 30 days. The Ministry of Commerce will have the power to veto the creation of new red chips, which are often formed by incorporating Chinese assets into shell companies based in tax havens such as the Cayman Islands or British Virgin Islands. The new rules are likely to push Yingli Solar's US$400 million NASDAQ offering back into mid-2007, while bankers were trying to push other deals through ahead of the Friday deadline.