The concept of red chip was initiated from Hong Kong Stock Market in early 1990s. China sometimes is called red China internationally. Correspondingly, Hong Kong and International investors call stocks of concept of mainland China registered overseas and listed in Hong Kong “red chip shares stocks”.
In general, red chip means the actual controller of domestic enterprises registers a company in offshore financial center where planned listed company will register according to domestic laws; the Company turns the domestic company to a foreign-invested enterprise and becomes an overseas holding company through reverse take-over of domestic entity to be listed. Later, the overseas holding company will be listed as the entity, but the main assets and businesses of the overseas holding company are still in China. Overseas recombination is a basic step of red chip listing, and aims to restructure equity and assets of domestic enterprises and allow the overseas holding company own or control equity or rights of domestic enterprises through legal approaches.