Investing in China: Types of Chinese Stocks

Chinese Stocks Consist of Four Types

The Chinese stock market, founded 100 years ago, is where shares of Chinese companies are traded. It is the second largest in the world, behind the United States. It's important to note that China's stock market doesn't indicate the health of China's economy, unlike the U.S. stock market. The total value of every stock traded on its exchanges is only a third of its economic output, as measured by Gross Domestic Product. That compares to 100 percent of most developed countries.

How Trading in China Is Different

Investing in a particular country is typically a pretty straightforward affair. French stocks trade in Paris, Japanese stocks trade in Tokyo, and Brazilian stocks trade in Sao Paulo. It's all pretty straight-forward except when it comes to investing in China, which is a little more complicated. When someone talks about the “Chinese market” or “Chinese stocks,” they may be referring to one of several markets or types of stocks in locations. At first glance, the menu of investment choices in China can seem like a confusing alphabet soup of share classes, each with its own unique characteristics. The following takes a look at each type of share in order to better understand the key differences between them.

Chinese A Shares

China’s “A Share” market refers to stocks that trade on the Shanghai and Shenzhen exchanges. These companies are incorporated in mainland China and their shares are denominated in the local currency or renminbi. For individual investors, the gyrations of the "A share" market may be fun to watch, but these stocks are strictly off limits to non-Chinese investors. For astute professional investors, however, there are a few ways around this restriction.

Chinese B Shares

Here’s where it starts to get confusing. Some Chinese companies are listed in Shanghai and Shenzhen, but their shares trade in U.S. dollars. These stocks, known as “B shares,” were historically designed to give Chinese companies a way to raise capital from overseas. "B shares" also allowed non-Chinese investors to invest in the market without the restrictions associated with "A shares." However, over time, the "B share" market has become relatively illiquid.

Hong Kong H Shares

"H Shares" are also Chinese companies, but these securities trade on the Hong Kong Stock Exchange, rather than on the mainland, and they are priced in Hong Kong dollars. While it is still relatively uncommon, and a somewhat cumbersome process, it is technically possible for individual investors to buy and sell shares on the Hong Kong market.

Chinese Stocks in New York

Because investor interest in China has grown in recent years, a new crop of Chinese stocks has emerged. These are companies that are headquartered in mainland China but have chosen to list their shares on the New York Stock Exchange or Nasdaq. There are currently over 100 such Chinese companies listed in the U.S., and the list continues to grow. For individual investors, shares of New York-listed companies are by far the easiest way to get started for those interested in investing in Chinese stocks.

Shanghai-Hong Kong Stock Connect

The last piece of the puzzle is the Shanghai-Hong Kong Stock Connect, which connects the Shanghai Stock Exchange and the Hong Kong Stock Exchange. The reasoning behind the connection was to open up the Chinese markets to additional investors by way of Hong Kong. However, so far, the operation is limited to large investors. But, these dynamics could change over the coming years as the market opens up more.

Looking Ahead

The Shanghai-Hong Kong Stock Connect was launched in late 2014 to connect the Shanghai Stock Exchange and the Hong Kong Stock Exchange. Under the program, investors in each market were able to trade shares on the other market using their local brokers and clearing houses. The program is slowly gaining traction after initially being limited to only wealthy investors. Investors should also be aware of the risks in Chinese equity markets. For instance, the average Chinese investor holds a stock for just 24 days compared to 260 days for investors in Hong Kong and longer for investors in the United States. These dynamics can cause wild swings in the markets, as were observed in late-2015 and 2016, which can introduce a high level of risk for international investors buying any of these classes of shares. As a result, investors should ensure that their portfolio is adequately diversified to avoid these risks. In the end, China's market is gaining traction and its economy remains one of the largest in the world, which means that international investors should have some kind of exposure. Those that aren't comfortable trading shares may want to look into ETFs as an alternative.