Hong Kong Plunge Signals New Problems for China

China Telecom was supposed to be the hottest stock to hit Hong Kong since the handover to China on July 1.

But a 25 percent plunge in Hong Kong's stock market last week disconnected the company from a dazzling debut, and it could pull the plug on Beijing's plans to overhaul its debt-burdened, state-owned companies.

China Telecom's was the largest stock offering ever in Hong Kong, touted as a unique opportunity to invest in China's booming telecommunications industry.

International investors were eager for a piece of the mainland utility, China's largest mobile phone service provider, and Hong Kongers lined up for shares.

But Telecom debuted Thursday with a 10 percent loss.

A grand entrance on the day Hong Kong suffered the biggest drop in its history didn't help, but more than that, say analysts, sentiment toward mainland Chinese subsidiaries - known as "red chips" for their close links to China's government - has soured.

Many red chips have seen half their value in the stock market disappear.

Drops like these could undermine Chinese President Jiang Zemin's plans to restructure more than 300,000 state-owned companies.

Much of the money to finance these reforms is supposed to come from stock markets, and Hong Kong offers the prime window for these listings.

At least 80 companies with official links to China already trade on the Hong Kong Stock Exchange.

But Chinese firms may now have trouble finding investors.

"If you can't use the equity route, then you have a big problem," says Gary Greenberg, chief investment officer at Peregrine Asset Management in Hong Kong.

"You can't just raise $300 billion (Hong Kong; US$38.8 billion) anywhere," he explains. "It makes a lot more sense to use IPOs," initial public offerings of stock.

Things could already be looking up, though.

On its second trading day, China Telecom surged 15 percent to finish about 4 percent above its IPO price (at $12.15 HK).

But many analysts suspect that money from the mainland was behind the rally. They say Beijing can't afford to let the Telecom listing flop.

"You would expect China to do whatever they can to ensure that Hong Kong remains a viable place to raise capital," Greenberg says.

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