H-Shares vs. A-Shares: What's the Difference?
Buying shares in publicly traded companies is more difficult in the People's Republic of China (PRC) than in the US. On Chinese stock exchanges, there are strict limitations on who can purchase and what can be sold. In contrast, anyone who has the cash to buy them can also frequently access shares traded on public markets in the United States. If you want to start trading or investing there, you must understand the differences between different share types, especially between H-shares and A-shares.
One of three share classifications, namely A-shares, B-shares and H-shares, best describes publicly traded Chinese companies. Let's understand each in brief:
Depending on where they are listed, all three shares may trade in renminbi, although their denominations may vary.
Stocks of companies with their primary offices in mainland China that are listed on the Shanghai or Shenzhen stock exchanges are known as Chinese A-shares. The only people who generally trade A-shares are Chinese citizens who also usually live on the mainland. However, a controlled environment allows foreign investment in specific industries. Some institutional investors might be permitted to participate in QFIIs or other rigorous trading programmes. The prerequisites for obtaining QFII status and being permitted to purchase and sell Chinese A-shares have only been met by a small number of institutional investors.
China began allowing mainland investors to purchase A- or H-shares of companies that were listed on the Shanghai Stock Exchange after 2007. Before that, mainland Chinese investors could only purchase A-shares even though H-shares were also made accessible. H-shares are more liquid than A-shares because overseas investors are allowed to trade them.
According to Chinese legislation, A-shares are issued in China and traded for Chinese yuan or renminbi. Americans, who do not meet the QFII requirements, would be able to purchase these shares only through an emerging markets fund or the purchase of American depositary receipts (ADRs).
Emerging Markets MSCI Index
Much work has been done over time to improve the prospects of individual foreign investors being allowed to purchase A-shares. Examining several investment options, such as exchange-traded funds (ETFs) and other funds that might include A-shares, is one typical way investors might accomplish this.
In 2020, the MSCI Emerging Markets Index, which includes some large- and mid-cap A-shares from China, weighted the Chinese market at 40.95%. In 2018, the same index represented 32.72% of the value of the Chinese market.
Following favourable comments from investors, the business announced in February 2019 that it would increase the weight of large-cap A-shares from 15% to 20% by November 2019. After the transfer, the company anticipated that the index would contain 253 large-cap A-shares in addition to 168 midcap A-shares.
The stock certificates for publicly traded Chinese companies that are 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 rules.
Sections describing the distinctions between domestic and foreign shares, including H-shares, and the rights granted to each buyer must also be included in a company's articles of incorporation.
H-shares quote and trade with a face value of Hong Kong dollars, while A-shares are listed on the Shanghai or Shenzhen stock exchanges and trade in Chinese renminbi. H-shares are also tradeable by all investors. Usually, a company's A-shares and H-shares trade at different values. Furthermore, A-shares typically trade at a premium to H-shares.
B-shares, which are also made up of Chinese firms, are priced in foreign currencies, including the US dollar (USD) and the Hong Kong dollar (HKD), depending on the listing market. More B-shares are available to foreign investors.
An American Depositary Receipt (ADR) is one way to invest in China. These certificates, which represent a number of shares of foreign businesses, are exchanged on the American market. Investors who ordinarily cannot invest in a foreign company can do so with no restrictions, thanks to ADRs. They trade on American exchanges and are valued in dollars, so there are no issues with pricing, currency values, or exchanges.