Investing in China - Types of Chinese Stocks

Chinese Stocks Consist of Four Types

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. Sounds easy enough, right? Investing in China 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. 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. Let’s take a closer look at each one 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 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 foreign (non-Chinese) investors to invest in the market without the restrictions associated with A shares. Over time, however, 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

As 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 nearly 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 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 goal was to open up the Chinese markets to additional investors by way of Hong Kong, but so far, the scheme is limited to large investors. These dynamics could change over the coming years, however, as the market opens up.

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 to be able to trade shares on the other market using their local brokers and clearing houses. The program is slowly gaining traction after being limited to only wealthy investors at the start. 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.