China A-shares are the stock shares of mainland China-based companies that trade on the two principal Chinese exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). Historically, China A-shares were accessible only to mainland citizens due to stringent foreign investment restrictions.
However, since 2003, selected foreign institutions can purchase these shares through the Qualified Foreign Institutional Investor (QFII) system. This program, established in 2002, enables licensed international investors to engage in trading on mainland China’s stock exchanges.
A-shares, also called domestic shares, are valued in renminbi (RMB).
Key Takeaways
- China A-shares represent stocks of China-based companies trading on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
- Initially, only mainland citizens could purchase China A-shares due to foreign investment restrictions.
- A-shares differ from B-shares; while A-shares are quoted in RMB, B-shares are quoted in foreign currencies, such as the U.S. dollar, offering more availability to foreign investors.
China A-Shares vs. B-Shares
China A-shares are distinct from B-shares in several ways. A-shares are quoted in RMB exclusively, while B-shares are quoted in foreign currencies like the U.S. dollar and are more readily available to foreign investors. Due to Chinese government regulations, foreign investors might find it challenging to access A-shares, and Chinese investors might encounter obstacles accessing B-shares due to currency exchange issues. Some companies list their stock on both the A-shares and B-shares markets.
The broader availability of B-shares to foreign investors usually leads to these shares being traded at lower valuations compared to their A-share counterparts. Despite the increased access for foreign investors to A-shares now, there is a yearly cap of 20% on fund repatriation to foreign countries.
The Shanghai Stock Exchange (SSE) tracks the SSE 180 Index, a key performance index for A-shares. This index, constituted by selecting 180 stocks listed on the SSE, balances sector, size, and liquidity to represent the overall market aptly.
History of China A-Shares
Since their inception in 1990 and a significant reform in 2002, China A-shares have experienced notable fluctuations. The notable period from 2015 to 2016 saw a challenging drawdown of -21.55%. Over time, they have grown parallel to the Chinese economy’s evolution.
As China progresses from an emerging market to an advanced economy, there is considerable demand for Chinese equity. Regulatory bodies continually strive to make A-shares more accessible to global investors. A significant step in this direction was the 2017 inclusion of 222 China A large-cap stocks in the MSCI Emerging Markets Index, marking phased inclusion of China’s large-cap A shares.
Global integration is crucial for China’s continued economic growth and competition. China A-shares offer an enticing avenue for those keen on trading within the burgeoning Chinese market.
Related Terms: B-Shares, Qualified Foreign Institutional Investor (QFII), Shanghai Stock Exchange, Shenzhen Stock Exchange, MSCI Emerging Markets Index.
