H Shares 101: A Guide to Investing in China

H Shares are a type of stock that allows foreign investors to buy into Chinese companies listed on the Hong Kong Stock Exchange.

They were first introduced in 1993 to attract foreign investment into China's growing economy.

To invest in H Shares, you'll need to open an account with a broker that offers trading in Hong Kong stocks.

This can be done online or through a physical branch, depending on your preference.

H Shares are traded in Hong Kong dollars, which can be converted to other currencies if needed.

Some of the benefits of investing in H Shares include access to a large and growing market, and the potential for higher returns than investing in A Shares, which are traded on the Shanghai and Shenzhen stock exchanges.

A-shares are the shares of incorporated companies based in mainland China listed on the Shanghai or Shenzhen stock exchanges.

These shares are issued in China under Chinese law and are quoted in Chinese yuan or renminbi.

Only citizens of mainland China can purchase A-shares, making it difficult for foreign investors to get into the market.

A-shares are generally less liquid than H-shares, which are more accessible to foreign investors.

Foreign investors may trade H-shares, but for American investors who are not Qualified Foreign Institutional Investors (QFIIs), A-shares can be accessed through emerging market funds or American depositary receipts (ADRs).

In 2020, the MSCI Emerging Markets Index allocated 40.95% of its weight to the Chinese market, including large and mid-cap A-shares.

The MSCI index has made efforts to enhance opportunities for foreign individual investors to trade A-shares, including through exchange-traded funds (ETFs) and other funds.

Investing in China can be a complex process, but understanding the basics can help you navigate the market. Chinese stock markets impose stringent restrictions on investors, and it's essential to familiarize yourself with the distinctions between different types of shares.

There are three main types of shares: A-shares, B-shares, and H-shares. A-shares are denominated in yuan renminbi (CNY) and are listed on domestic stock exchanges like the Shanghai and Shenzhen Stock Exchanges. B-shares, on the other hand, are traded in foreign currencies and are listed on the Shanghai and Shenzhen stock exchanges. H-shares, which are traded on Hong Kong's stock exchanges, are freely tradable by any investor and are denominated in Hong Kong dollars (HKD).

The Shanghai-Hong Kong Stock Connect system, established in 2014, facilitates mutual market access by linking the Shanghai and Hong Kong Stock Exchanges. This system allows investors to trade shares in both markets using their brokers, and transactions occur in Chinese yuan (CNY).

Here are the key differences between H-shares and A-shares:

Investing in China can be a complex process, but foreign investors have several options to consider. One way to invest in Chinese companies is through exchange-traded funds (ETFs), mutual funds, and index funds that hold Chinese companies in their portfolios.

You can also buy American depositary receipts (ADRs) that represent a number of shares in Chinese companies, which trade on U.S. exchanges in U.S. dollars. This option provides a relatively straightforward way to invest in Chinese companies without having to navigate the complexities of the Chinese stock market.

Another option is to invest directly in Chinese companies that trade on the Hong Kong Stock Exchange by executing trades on an international trading platform through a brokerage firm. This option requires more expertise and involves more risk, but it can also provide greater potential rewards.

B-shares, which are quoted in foreign currencies such as the U.S. dollar and the Hong Kong dollar, offer broader accessibility to foreign investors. However, A-shares, which are denominated in yuan renminbi, are primarily traded by mainland Chinese citizens and are subject to stricter regulations.

If you're interested in investing in A-shares, you'll need to meet certain requirements and obtain the necessary approvals. One option is to become a Qualified Foreign Institutional Investor (QFII), which allows you to buy and sell A-shares. However, this designation is only granted to a limited number of institutional investors.

Alternatively, you can invest in A-shares through emerging market funds or American depositary receipts (ADRs). This option provides a more indirect way to invest in A-shares, but it can also be a more accessible and less complex option for foreign investors.

The Shanghai-Hong Kong Stock Connect system, established in 2014, provides another avenue for investment in China. This system links the Shanghai and Hong Kong Stock Exchanges, allowing investors to trade shares in both markets using their brokers.

Here are some key differences between H-shares and A-shares:

As you can see, H-shares are more liquid and tradeable than A-shares, making them a more attractive option for foreign investors. However, A-shares offer greater potential rewards and are subject to less stringent regulations. Ultimately, the choice between H-shares and A-shares will depend on your individual investment goals and risk tolerance.

Tencent is a company that's listed on multiple exchanges.

It's listed on the Hong Kong Stock Exchange, where it's available for foreign investors to buy.

Tencent is also listed on the Nasdaq as an American depository receipt (ADR).

This makes it accessible to a wide range of investors.

H-shares are subject to the listing requirements of the Hong Kong Stock Exchange and must follow Hong Kong or international accounting standards.

A company's articles of incorporation must include sections clarifying the varying nature of domestic shares and foreign shares, including H-shares, as well as the rights given to each purchaser.

H-shares are open for trading by all categories of investors, including international investors. Investors in the US can buy and sell H-shares through their brokerage firm's international trading platform.

A-shares, on the other hand, are not open to foreign investment and are primarily traded by mainland Chinese citizens.

H-shares quote and trade with a face value of Hong Kong dollars, while A-shares are denominated and traded in Chinese renminbi.

There are usually price discrepancies between a company's A-shares and H-shares, with A-shares often commanding a premium over H-shares.

Here are the key regulations governing H-shares:

A-Shares are a type of share that's specific to the Chinese market, and they're listed on exchanges in mainland China, such as the Shenzhen and Shanghai Stock Exchanges.

In 2020, the MSCI Emerging Markets Index allocated a significant 40.95% of its weight to the Chinese market, which includes large and mid-cap A-shares from China.

Investing in A-Shares can be challenging for foreign investors due to conservative rules that govern the Chinese Equity Market.

A-Shares are less liquid than H-Shares, making them more difficult to trade.

Here are some key differences between A-Shares and H-Shares:

The inclusion of A-Shares in the MSCI Emerging Markets Index has made it easier for foreign investors to trade them, with the weight of large-cap A-shares increasing from 15% to 20% in 2019.

The H-Share Index is actually the Hang Seng China Enterprises Index (HSCEI), which tracks H-shares in China. These H-shares are mainland Chinese companies listed on the Hong Kong Stock Exchange and available to foreign investors.

Over 300 Chinese companies have H-shares, offering foreign investors a way to tap into the Chinese market.

A-Shares are a type of share that allows mainland Chinese investors to invest in public limited companies in China. They trade on Chinese exchanges such as the Shanghai and Shenzhen Stock Exchanges.

Investing in A-Shares can be difficult for foreign investors due to conservative rules in the Chinese Equity market. Several rules prevent foreign investors from directly investing in the Chinese Equity Market.

To invest in A-Shares, foreign investors must navigate a more complicated process compared to H-shares. A-Shares are also less liquid than H-shares, making them less tradable.

The price of A-Shares is typically higher than H-shares of the same company, due to their relative illiquidity. This premium can be a drawback for investors who value liquidity.

Here's a comparison of A-Shares and H-Shares: