(Yicai Global) March 28 -- Shares of Er-Kang Pharmaceutical hit the upper daily limit today after the company said it plans to invest in hemp production and the research and development of hemp-derived products, despite the plant not being sanctioned for use in medicines and food in China.

Changsha-based Er-Kang's stock [SHE:300267] jumped 10 percent, the maximum imposed by the Shenzhen Stock Exchange, to CNY5.25 (78 US cents). That is the stock's highest price since last June.

China's biggest maker of pharmaceutical excipients and Shanghai-based Yuangui Asset Management will form a CNY52.5 million (USD7.8 million) equity investment fund to subscribe to no more than 10 percent of Sumai Biotechnology, a hemp producer based in southwest Yunnan province, it said today. Yuangui Asset will manage the fund. Er-Kang will also cooperate on the R&D of hemp-based medicinal treatments.

Hemp has become an investment hotspot in the Chinese stock market since the beginning of this year. Stocks of many listed companies surged after they announced entry into the hemp cultivation and processing sector. But China has not approved the cultivation of hemp for medical use, nor the selling of drugs containing active cannabinoids such as tetrahydrocannabinol.

Hemp for medical use is essentially the same as that used for narcotics and cannot be excluded from strict control, the Office of the National Narcotics Control Commission said on its website recently, citing Hua Zhendong, Deputy Director of Narcotics Laboratory, Anti-drug Information Technology Center, under the Ministry of Public Security.

Er-Kang did not disclose the shareholding ratio of the two investors in the equity investment fund, nor the amount of investment, only saying that the valuation of the target company's assets will be determined in a formal evaluation report issued by agencies approved by the Chinese Securities Regulatory Commission.

Er-Kang will pay CNY10 million to the target company within three working days after signing the agreement as a mark of its sincerity over the investment and cooperation. The money will be returned after the target company receives the investment capital, according to the announcement.

On completion of the investment, Er-Kang and the target company will jointly establish an R&D center for hemp's medicinal use and to explore the plant's application in the treatment of chronic ailments and degenerative diseases, the announcement stated.

The target company promises that its hemp medicinal products will give priority to the use of pharmaceutical excipients such as starch capsules provided by Er-Kang, the announcement said.

Er-Kang also plans to cooperate with the target company to explore the clinical application of a Tibetan medicine, it said.