H-shares refer to a type of shares issued by Chinese mainland companies which are available for foreign investors. Actually, this is their main distinctive feature, because for a long time the Chinese market was closed to foreigners.
China is often characterized by a strict policy that expands to a lot of areas within the country. The area of trading isn’t an exception. Chinese shares aren't as available for traders as shares of other countries such as the US, Russia, and European countries. Even if you have money to buy them, it won't be easy, because the government of China sets precise boundaries for trading Chinese shares – who is allowed to do it and which type of shares is available for a certain type of investor.
The appearance of H-shares in some ways symbolizes an opening of the Chinese market to international trading. Since 2002-2003 there have been many more opportunities for foreign as well as Chinese traders to make investments in financial, manufacturing, or other industries. The international trading of H-shares becomes possible due to the activity of the Qualified Foreign Institutional Investor (QFII) system.
H-shares abide by the law of China. Nevertheless, they are presented on the Stock Exchange of Hong Kong (SEHK) and other forex markets in Hong Kong dollars. More than 200 Chinese companies issued H-shares along with A-shares.
Comparison of H-Shares and A-shares
We describe H-shares shortly, now let’s define A-shares comparing them to H-shares. Basically, it’s another type of Chinese shares mostly distributed among the Chinese citizens.
Both of these shares are issued by Chinese companies, but have important differences, starting with the government restrictions applied to them. A-shares are traded mostly within the country, while H-shares are available for international trading. Also, they differentiate from each other by their currency. A-shares are traded in yuan, and H-shares – in Hong Kong dollars. Due to their presence on the international forex market H-shares are more liquid than A-shares. However, A-shares are actively used among Chinese investors and frequently sold at a premium, or for the price above their initial value. Also, the reason for trading these shares for a higher price is that trading A-shares for foreigners as well as investing in foreign companies is still highly controlled and restricted in China.
Chinese market openness
As it was mentioned before, since 2002 H-shares have become available for licensed investors from other countries. The following step of the Chinese market opening was to allow Chinese people to trade on the foreign exchange markets. In 2007 Chinese investors got an opportunity to buy A- and H-shares of the companies presented on the Shanghai Stock Exchange instead of trading A-shares only.
Restrictions for issuance H-shares
H-shares are regulated almost the same as other types of shares on the Hong Kong Exchange. However, there are a few additional rules applied specifically for H-shares as shares for foreign investors. Some of these rules are described below:
- annual reports on H-shares have to obey the Hong Kong or international accounting standards;
- companies’ legal documentation has to define the number of domestic and foreign shares, and their possibility to vary;
- rights given to investors with the purchase of shares should be clearly stated in the associated documents;
- investors must be protected according to the Hong Kong law system.
Peculiarities of the Chinese stock market
The Chinese market has been developing as a unified and isolated type of stock market for a long time. It was a kind of closed community. Shares of Chinese companies were unavailable for foreign investors, and Chinese citizens were unable to trade on foreign markets. Even the creation of different types of shares – A- and H-shares – is a unique strategy. Nowadays, the Chinese policy has been changing the rules towards market regulation. In 2014 the Hong Kong and Shanghai Stock Exchanges were linked to each other, making the Chinese stock market the biggest one in the world.
If you’re interested in entering the Chinese market, you can search for more information about it as well as about different types of shares issued by Chinese companies. For example, ZTE Corporation is a global leader in telecommunications and information technology that was founded in China in 1985. The company issued both A-shares and H-shares on Shenzhen and Hong Kong Stock Exchanges.