Understanding A-share (mainland China) Stocks and the Market

A-share stocks are a type of stock that trades on the Shanghai and Shenzhen stock exchanges in mainland China.

These stocks are also known as "domestic stocks" or "main board stocks", and they're the most widely traded type of stock in China.

Investors can buy and sell A-share stocks on the two main stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE).

Shares are the building blocks of the stock market, and in the context of mainland China, they're denominated in Renminbi (RMB).

These shares, also known as A-shares, represent ownership in companies based in mainland China and are listed on the Shanghai or Shenzhen stock exchanges.

Top companies like Midea Group, Fosun Pharma, and the Industrial and Commercial Bank of China (ICBC) have their A-shares listed on domestic stock exchanges.

A-shares are traded on the Chinese stock exchanges, including the Shanghai Stock Exchange and the Shenzhen Stock Exchange, and are available for purchase by mainland Chinese investors and, under certain conditions, foreign investors.

Shares are a type of security that represents ownership in a company, such as Midea Group or the Industrial and Commercial Bank of China (ICBC).

They can be denominated in a specific currency, like Renminbi (RMB), and traded on stock exchanges, including the Shanghai and Shenzhen Stock Exchanges.

A-share companies are typically based in mainland China and listed on these domestic stock exchanges.

Foreign investors can access the A-share market through programs like the Qualified Foreign Institutional Investor (QFII) system or Stock Connect links with Hong Kong.

Shares of mainland China-based companies, such as those listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, are also referred to as A-shares.

Shares matter because they provide a vital mechanism for companies to raise capital. A-shares, in particular, are an important part of China's financial markets.

Chinese companies rely on A-shares to gain access to capital, and international investors can gain direct exposure to the Chinese domestic economy by investing in A-shares. This economy is the world's second-largest economy.

The inclusion of A-shares in major global indices, such as the MSCI Emerging Markets Index, highlights their growing significance in the global investment landscape. This increased visibility encourages foreign participation in the Chinese equity markets.

A-share investing offers a unique opportunity for diversification, as China's onshore equities have historically had a low correlation to other assets, according to JP Morgan.

This means that A-shares can provide higher returns for each given level of additional risk, making them an attractive addition to a portfolio. China's economy is undergoing a realignment, shifting from an investment and export-driven economy to a more consumption and innovation-driven market.

The A-share market is expected to continue growing and modernizing, with a broader-based exposure to consumer-oriented companies, including technology, healthcare, and high-end manufacturing. This is reflected in the MSCI China-A Index, which offers greater exposure to small and mid-cap stocks that typically service the domestic economy.

Foreign investors can access A-shares through various channels, including the QFII scheme, RQFII scheme, and Stock Connect programs, which have quotas and require regulatory approval but offer a gateway to the mainland China equity market.

Investing in A-shares involves risks such as market volatility, regulatory and political risk, and currency risk. However, the A-share market is also known for its rapid price movements, which can result in significant gains or losses.

Here are some key statistics on the A-share market:

These statistics highlight the size and scope of the A-share market and its potential for diversification.

Investing in A-Shares can be a great way to diversify your portfolio and tap into China's growing economy. The Chinese domestic equity market is still in its infancy, with trading dominated by retail investors and a regulatory environment that's volatile and susceptible to the Chinese domestic political environment.

One of the top reasons to invest in China A-shares is their low correlation with other assets, offering clear diversification opportunities. This is due to China's unique economic and policy cycles, which have historically had a low correlation to other assets.

According to JP Morgan, a dedicated allocation to A-shares of up to 10% over and above current benchmark index weights would result in a more optimised portfolio with an improved efficient frontier. This means A-share investors can expect higher returns for each given level of additional risk.

China's economy is undergoing a realignment, transitioning from an investment and export-driven economy to a more consumption and innovation-driven market. This shift is reflected in the equity market, with a greater emphasis on consumer-based sectors and a move away from export-oriented ones.

Some of the beneficiaries of China's economic transformation include technology, health care, and high-end manufacturing. Offshore-focused benchmarks may focus more on technology and communication services sectors, but onshore indices offer a broad-based exposure to an expanding share of consumer-oriented companies.

The MSCI China-A Index offers greater exposure to small and mid-cap stocks that typically service the domestic economy. It has about 25% allocation to companies under a $10 billion market cap, as against 16% in both MSCI China and MSCI EM.

Here are the key benefits of investing in China A-shares:

Overall, investing in China A-shares can provide a unique opportunity to tap into China's growing economy and diversify your portfolio. With their low correlation to other assets and greater exposure to small and mid-cap stocks, A-shares can be a valuable addition to any investment portfolio.

Short selling and margin trading of individual stocks in the Chinese stock market were not allowed until March 2010, when the ban was lifted on a trial basis to improve market liquidity.

The initial list of allowed stocks was highly selective, consisting of only 90 stocks with good earnings performance and minimal volatility, but this expanded to about 800 stocks by September 2014.

Many investors ramped up their leverage through buying shares on margin after the policy change, which was believed to greatly contribute to the 2015 stock market boom and bust.

To discourage brokerage firms from short selling activities, the CRSC took steps to crackdown on malicious short sellers.

Short selling and margin trading are now allowed, but it's still very expensive to short individual names and short selling levels are extremely low compared to the United States.

You can short a basket of China A-shares through index futures and ETFs, such as the FTSE A50 futures traded in Singapore, which are currency hedged to USD.

However, this means you'll need to short CNH futures on the Chicago Mercantile Exchange (CME) or enter a short forward contract on CNH to hedge out the currency risk.

A much easier path is to short one of the many China A-shares index ETFs, which generally track an index like the CSI 300, FTSE A50, or MSCI China A.

If you're looking to hedge your market risk, those are worth looking into, but make absolutely sure you use a China A-shares ETF and not a general China ETF to avoid massive basis risk.

The China A-share market is massive, with a total market cap of $11 trillion as of December 30, 2022, making it the second largest globally after the US.

China A-shares represent 75% of China's total equity value, with large-cap stocks being the largest market segment. The mid-cap stocks, however, are roughly the size of Germany.

Investors have limited exposure to Chinese stocks, especially China A-shares, with an average international investor's total exposure to Chinese equities being just 4.6% of its total assets.

The China A-share market is massive, representing 75% of China's total equity value as of December 30, 2022, with a total market cap equivalent to $11 trillion.

This makes the onshore listings market the second largest globally, after the US. Large-cap China A-shares are the largest market after the US, while mid-cap stocks or the S&P China A MidCap 500 Index are roughly the size of Germany.

China A-shares are larger than several established markets, including Australia, South Korea, Hong Kong, Sweden, the Netherlands, and Brazil.

The average international investor's total exposure to Chinese equities is just 4.6% of its total assets, which is a relatively small portion.

The China A-share market is an evolving asset that offers attractive growth from the fast-growing consumer and service demand. Fast-growing consumer demand is a significant driver of growth in the China A-share market.

China A-shares are benefiting from continued reform efforts, which is helping to drive growth. Reform efforts are making the market more attractive to investors.

About 80% of the participants in the onshore market are retail investors who often overreact to market sentiment, leading to inadequate distribution and volatility. This is a challenge that investors need to be aware of.

The small- and mid-cap segments of the China onshore market have historically witnessed higher dispersion of returns and were riskier compared to larger-size segments. This is according to the MSCI.

Increasing numbers of Chinese companies are depending on domestic demand, which makes them less affected by global economic and interest rate cycles. This is a positive trend for the China A-share market.

Price Limits play a crucial role in stabilizing the market.

The maximum allowed price movement is 5% in a single trading session, as per the market rules. This helps prevent extreme price fluctuations that can be detrimental to investors.

Investors often use stop-loss orders to limit their losses when the market price reaches a certain threshold.

In our previous analysis, we saw how a 5% price limit can be set at $100, meaning the stock price cannot exceed $105 or drop below $95. This provides a safety net for investors.

The price limit is usually set by the exchange or regulatory body, and it's essential to understand the specific rules that apply to your trading activities.

The Chinese market has made significant strides in opening up to foreign investors. In 2020, the MSCI Emerging Markets Index allocated 40.95% of its weight to the Chinese market.

Prior to this, the market was largely restricted to mainland Chinese citizens. But now, global investors can access it through programs like the QFII, RQFII, and Stock Connect.

One notable example of this expansion is the Shanghai-Hong Kong Stock Connect system, established in 2014. This system allows investors to trade shares in both markets using their brokers.

Transactions occur in Chinese yuan (CNY), not Hong Kong dollars, removing typical restrictions for foreign investors seeking to buy A-shares.

Foreign investors can access A-shares through channels like the QFII scheme, RQFII scheme, and Stock Connect programs linking Shanghai and Shenzhen exchanges with the Hong Kong Stock Exchange.

These mechanisms have quotas and require regulatory approval but offer a gateway to the mainland China equity market for international investors. Only a limited cadre of institutional investors, recognized as Qualified Foreign Institutional Investors (QFIIs) or participants in stringent trading programs, gains access to A-shares.

A-shares are primarily catered to mainland Chinese citizens for trading, but foreign investment in these firms is feasible under-regulated structures. A-shares, issued under Chinese law, are quoted in Chinese yuan or renminbi.

For American investors lacking QFII qualification, accessing these shares typically involves investment via emerging market funds or American depositary receipts (ADRs). H-shares, available to foreign investors, exhibit greater liquidity than A-shares.

In mainland China, A-share listings are subject to various regulations and rules. The China Securities Regulatory Commission (CSRC) is responsible for overseeing the A-share market.

The CSRC sets rules for IPOs, such as requiring companies to have a minimum of two years of operating history and to have made a profit in the previous two years. Companies must also meet certain listing criteria, including having a certain number of shareholders and a minimum market capitalization.

The Shanghai Stock Exchange and Shenzhen Stock Exchange, the two main A-share exchanges, also have their own rules and regulations. For example, the Shanghai Stock Exchange requires listed companies to have a minimum of 100 shareholders.

The China A-share market is not as heavily regulated as other markets, which means investors have less protection and recourse. This lack of regulatory compliance can lead to a higher risk of market volatility.

Investing in the A-share market can be challenging due to uneven sector representation in the MSCI EM index. Financial and industrial sectors, which have a significant weightage, are more exposed to political risks.

Domestic retail investors, who account for more than 80% of daily turnover, primarily focus on short-term trading profits, contributing to higher volatility. Local Chinese equity analysts tend to be less experienced than those in developed markets, leading to a greater frequency of earnings surprises.

The regulatory environment in China is evolving at a fast pace, but it remains fairly unpredictable, exacerbating risks. As a result, stock-trading suspensions and high dispersion of returns are common in the A-share market.

However, these risks are characteristic of many developing markets and tend to dissipate as the market matures. In Taiwan, for example, the influence of foreign investors and domestic institutions has led to a decrease in volatility and stock-trading suspensions over the past 20 years.

Special Treatment stocks, or ST stocks, are subject to a 5% price limit. They become ST stocks by losing money two years in a row, having a negative audited net worth, or having an adverse audit opinion.

Losing money can have serious consequences for companies, as it can lead to delisting. In January 2021, exchanges strengthened the rules for delisting, including delisting for fraudulent activity.

Companies in China manage earnings through a mix of accruals, timing of extraordinary items, and real earnings management. This can make it difficult to predict the performance of ST stocks.

The number of ST and *ST stocks declined between 2008 and 2014, but rose again in 2019 and 2020 due to a tougher regulatory environment and COVID-19.

ST and *ST stocks are far more volatile than non-ST stocks, with a 33% volatility from January 2000 to February 2021. This makes them a riskier investment option.

Foreign ownership in China A-shares is capped at 30%. This means that as a foreign investor, you can't own more than 30% of a particular stock.

Only 9 stocks have a foreign ownership of over 24% as of February 2021. Midea Group and Gree Electric are two notable examples, with foreign ownership of 24% and 28% respectively.

Midea Group has a market capitalization of around 630 billion RMB, making it a significant player in the market. Gree Electric has a market capitalization of about 350 billion RMB.

Stocks with high foreign ownership tend to perform better, so it's worth keeping an eye on those near their foreign ownership limit.

The MSCI Inclusion and Index has been a significant game-changer for China A-shares. Prior to 2018, the MSCI Emerging Markets Index allocated 32.72% of its weight to the Chinese market, but this has since increased to 40.95% in 2020.

This increased weight has opened up new investment opportunities for foreign individual investors, who can now trade A-shares through exchange-traded funds (ETFs) and other funds that incorporate A-shares. The inclusion of A-shares in the MSCI Emerging Markets Index has also led to the incorporation of 253 large-cap and 168 midcap A-shares into the index.

In a notable move, MSCI announced in February 2019 that it would raise the weight of large-cap A-shares from 15% to 20% by November 2019. This adjustment was well-received by investors and has contributed to the growth of the Chinese market.

The MSCI Emerging Markets Index now includes large and mid-cap A-shares from China, providing foreign investors with a broader range of investment options.

H-Shares and B-Shares are also listed on foreign exchanges, making them accessible to global investors.

B-shares are denominated in foreign currencies, primarily targeting foreign investors. They're listed on Chinese exchanges in USD (Shanghai) and HKD (Shenzhen).

H-shares refer to shares of companies incorporated in mainland China that are listed on the Hong Kong Stock Exchange and denoted in Hong Kong dollars.

H-shares are a unique option for investors looking to access Chinese companies listed on Hong Kong's stock exchanges. They are subject to Chinese regulations, but freely tradable by any investor.

One key difference between H-shares and mainland stocks, or A-shares, is the currency in which they are traded. H-shares are traded using the Hong Kong dollar (HKD), whereas A-shares are denominated in yuan renminbi (CNY).

If you're considering investing in H-shares, it's essential to understand that they are listed on a different exchange than A-shares, which are listed on the Shanghai and Shenzhen Stock Exchanges.

Here's a quick summary of the main differences:

By understanding these nuances, you can make informed investment decisions and navigate the Chinese stock markets with confidence.

B-shares are denominated in foreign currencies, primarily targeting foreign investors, and are listed on Chinese exchanges in USD in Shanghai and HKD in Shenzhen.

A major difference between B-shares and H-shares is that B-shares are denominated in foreign currencies, while H-shares are denominated in Hong Kong dollars.

One thing to note is that B-shares are primarily targeted towards foreign investors, whereas H-shares are open for trading by all categories of investors.

H-shares, on the other hand, are denominated in Hong Kong dollars and are listed on the Hong Kong Stock Exchange.

In contrast to B-shares, H-shares are subject to the listing requirements of the Hong Kong Stock Exchange, which includes adhering to Hong Kong or international accounting standards.

The Shanghai main board has 1,585 stocks with a total market capitalization of 49.4 trillion RMB as of the end of February 2021.

Shanghai's main board stocks tend to have a lower free float percentage at 36% compared to Shenzhen's main board at 53%.

About 39% of the Shanghai Main Board's stocks are state-owned enterprises (SOEs).

The Shenzhen Main Board has 459 stocks with a total market capitalization of 10 trillion RMB as of the end of February 2021.

The Shenzhen Small and Medium Enterprises (SME) Board has 1,000 stocks comprising 14.2 trillion RMB in total market capitalization.

Only about 15% of the SME Board are SOEs.

The tech-heavy ChiNext has 905 stocks listed, making up 10.5 trillion RMB of total market capitalization.

Partly in response to the success of ChiNext, the Shanghai Stock Exchange launched the Science and Technology Innovation Board, or STAR.

Investing in China A-shares can provide clear diversification opportunities due to its low correlation to other assets. This is because foreign investors have little role in this market, making it less likely to see capital flight when global equities are volatile.

According to JP Morgan, a dedicated allocation to A-shares of up to 10% over and above current benchmark index weights would result in a more optimized portfolio with an improved efficient frontier, meaning higher returns for each given level of additional risk.

China's economy is undergoing a realignment, shifting from an investment and export-driven economy to a more consumption and innovation-driven market, making consumer-based sectors a beneficiary of this transformation.

Getting familiar with the Chinese stock market is crucial before investing. The market has unique features and changes frequently, making it a challenging but rewarding investment opportunity.

If you're new to China A-shares, getting a good overview of the markets is essential. Regulations change frequently, and there are enough implicit rules that it's worth a refresher.

The Chinese stock market has seen significant changes in recent years, particularly in short selling. In the past decade, short selling was not explicitly banned, but few investors were allowed to lend stock since the 2015 China A-shares crash.

Mutual funds, pension funds, and insurance companies were allowed to lend shares in mid-2020, causing a boom in short selling. However, in absolute terms, the volume is still much lower than other markets.

It's worth noting that the differences between China and the rest of the world are often exaggerated for the sake of a sales pitch. While it may make sense to pay someone to manage your China A-shares portfolio, a tempered and precise analysis can provide valuable insights.

China's unique economic and policy cycles offer a low correlation to other assets, making onshore equities a great diversification opportunity.

A dedicated allocation to A-shares of up to 10% can result in a more optimized portfolio with an improved efficient frontier, according to JP Morgan.

Institutional investors can benefit from China's economic transformation, which is shifting towards consumer-based sectors and away from export-oriented ones.

The MSCI China-A Index offers greater exposure to small and mid-cap stocks that service the domestic economy, with about 25% allocation to companies under a $10 bn market cap.

This means onshore Chinese equities are insulated from US-China tensions and less likely to be impacted by Chinese regulatory policies targeting offshore-listed large-cap companies, as per Alliance Bernstein.

Investors can expect higher returns for each given level of additional risk by including A-shares in their portfolios.