Comparison of H-Shares and A-Shares
In the People’s Republic of China (PRC), purchasing stock in publicly traded firms is more complicated than it is in the US. Chinese stock markets have stringent limits on who can buy and what is available to them for purchase, whereas shares traded on public markets in the United States are often accessible to anybody who has the money to pay for them. If you want to start trading or investing there, it’s crucial to understand the differences.
China’s publicly traded enterprises typically fall into one of three share categories:
Chinese stock exchanges like the Shenzhen and Shanghai Stock Exchanges trade A-shares, which are shares of publicly traded Chinese corporations. These shares are yuan renminbi traded (CNY).
B-shares are foreign investment shares that are domestically listed. They trade in foreign currencies and list on the Shanghai and Shenzhen exchanges.
Chinese law regulates H-shares, which are freely tradable by anybody and exchanged on the exchanges in Hong Kong. Hong Kong dollars are used in trading for these shares (HKD).
All three shares may have renminbi denominations but trade in different currencies, depending on where they are listed.
Shares of incorporated businesses with headquarters in mainland China that are listed on either the Shanghai or Shenzhen stock markets are known as Chinese A-shares. A-shares are typically exclusively traded by residents of mainland China. However, a regulated framework permits foreign investment in certain businesses. Some institutional investors may be eligible to participate in QFIIs or other stringent trading programs. Only a select few institutional investors have met the requirements to get QFII status and are authorized to buy and sell Chinese A-shares.
After 2007, China allowed investors from the mainland to buy A- or H-shares of companies that were listed on the Shanghai Stock Exchange. Prior to then, although H-shares were also made available, mainland Chinese investors could only purchase A-shares. H-shares are more liquid than A-shares because overseas investors are allowed to trade them.
A-shares are traded in Chinese yuan or renminbi and are issued in China in accordance with Chinese law. The sole route for Americans who do not meet the QFII requirements to purchase these shares may be through an emerging markets fund or by purchasing American depositary receipts (ADRs).
Emerging Markets MSCI Index
There has been a lot of work done to increase the chances for individual overseas investors to invest in A-shares. Examining various investment alternatives, such as exchange-traded funds (ETFs) and other funds, which may incorporate A-shares, is one method investors can achieve this.
The Chinese market was weighted 40.95 percent in the MSCI Emerging Markets Index in 2020, which also contains certain large- and mid-cap A-shares from China. The same index has 32.72 percent market share in China in 2018. The company stated in February 2019 that it would increase the weight of large-cap A-shares from 15% to 20% by November 2019 after receiving positive feedback from investors. The company predicted that after the transfer, the index will include 168 midcap and 253 large-cap A-shares.
Depending on the listing market, B-shares, which are also composed of Chinese corporations, are priced in foreign currencies like the US dollar (USD) and the Hong Kong dollar (HKD). Foreign investors get access to more B-shares.
The shares of publicly traded Chinese corporations listed on the Hong Kong Stock Exchange are known as “Chinese H-shares.” H-shares are issued in China in accordance with Chinese legislation and are bound by the listing criteria of the Hong Kong Stock Exchange.
Annual accounts must adhere to Hong Kong or worldwide accounting standards, according to the regulations.
6 The articles of incorporation of a firm must also contain sections outlining the distinctions between domestic and foreign shares, including H-shares, as well as the rights granted to each buyer.
H-shares quote and trade with a face value of Hong Kong dollars, in contrast to A-shares listed on the Shanghai or Shenzhen stock markets and trading in Chinese yuan. All investors can trade H-shares as well.
The A-shares and H-shares of a firm typically trade at different prices. Additionally, H-shares typically trade at a discount to A-shares.
An American Depositary Receipt is one option to invest in China (ADR). On the American market, these certificates, which reflect a number of shares of foreign corporations, are traded. For investors who ordinarily cannot invest in a foreign firm, ADRs remove any restrictions. There are no problems with pricing, currency values, or exchanges because they trade on American exchanges and are valued in U.S. dollars.
Shanghai-Hong Kong Stock Connect, a system created to provide investors with mutual market access, is an additional factor to take into account. The system was designed with the goal of connecting the Shanghai and Hong Kong Stock Exchanges and enabling investors to trade shares on each market using their preferred brokers. Stock Connect, which was founded in 2014, offers foreigners the chance to purchase A-shares without the usual limitations they come with. No transactions are made in Hong Kong dollars; they are all made in CNY.