What Are H-Shares?
H-shares represent a unique opportunity to invest in shares of Chinese mainland companies that are listed on the Hong Kong Stock Exchange or other foreign exchanges. While H-shares are regulated by Chinese law, they are denominated in Hong Kong dollars and traded like other equities on the Hong Kong exchange.
By Dec. 31, 2023, over 300 Chinese companies made H-shares available, giving investors access to critical economic sectors, including financials, industrials, and utilities.
Key Highlights
- China’s mainland companies offer H-shares residing on the Hong Kong Stock Exchange and other foreign exchanges.
- H-shares are denominated in Hong Kong dollars and regulated under Chinese law.
- H-shares provide access to over 300 companies, enabling broad exposure to the Chinese economy.
- H-shares contrast with A-shares, the latter initially restricted to mainland Chinese investors.
- Although foreigners can now trade A-shares, the process remains more complex compared to H-shares.
Understanding H-Shares
H-shares first became accessible in 1993 to invite foreign investment in mainland Chinese companies. Prior to this, companies issued A-shares, targeting only mainland Chinese investors.
In 2006, China allowed simultaneous listing of A-shares and H-shares for some corporations. Given that H-shares are more accessible to foreign investors, they often exhibit higher liquidity than A-shares, which tend to trade at a premium. While new mechanisms allow foreign trading of A-shares, the journey involves additional complexities.
H-Shares vs. A-Shares
A-shares come from public Chinese firms trading on Shenzhen and Shanghai Stock Exchanges or other Chinese exchanges. These shares, quoted in Chinese renminbi, are primarily for mainland Chinese citizens.
Foreign investors use the Qualified Foreign Institutional Investor system to access A-shares. Conversely, Chinese firms listing H-shares do so on the Hong Kong Stock Exchange. These shares, quoted in Hong Kong dollars, are freely traded by domestic and international investors.
Regulatory Framework for H-Shares
Issuers of H-shares comply with the Stock Exchange of Hong Kong’s (SEHK) Listing Rules for the Main Board and the Growth Enterprise Market (GEM). These regulations mandate that annual accounts adhere to Hong Kong or international accounting standards.
Moreover, a company’s articles of incorporation must elucidate the nature of both domestic and foreign shares, including H-shares, and stipulate purchaser rights. Such provisions aim to protect investors as per Hong Kong law, yet listing and trading H-shares follow protocols similar to other Hong Kong stocks.
Connecting Shanghai and Hong Kong Stock Exchanges
In 2014, the Shanghai-Hong Kong Stock Connect Strive was established, fortifying ties between the stock exchanges in Shanghai and Hong Kong. It updated regulations on eligible investors, boosting diversification for Chinese assets, streamlining the trading of Chinese stocks, and facilitating inclusion in global benchmark indices.
Consequently, this integration created a unified Chinese stock market, ranking among the world’s largest by market cap and daily trading turnover.
The H-Share Index Unveiled: Hang Seng China Enterprises Index
The H-share Index, notably the Hang Seng China Enterprises Index (HSCEI), tracks H-shares of mainland Chinese companies listed on the Hong Kong Stock Exchange, appealing to foreign investors. This index pools over 300 Chinese companies with H-shares.
Insights on Tencent
Yes, Tencent, listed on the Hong Kong Stock Exchange, classifies as an H-share company accessible to foreign investors. Tencent is also represented in the Nasdaq as an American depository receipt (ADR).
Understanding B-Shares in China
B-shares are from Chinese companies trading on the Shanghai and Shenzhen Stock Exchanges, denominated in renminbi. On the Shanghai exchange, B-shares settle in USD, while on the Shenzhen exchange, they are equivalent to HKD.
Conclusion
China’s regulatory environment shapes its intriguing yet complex financial sector. Past decades have seen a shift from exclusive mainland investment towards engaging global investors, with H-shares opening doors in the 1990s.
Investors eager for a stake in Chinese firms can opt for H-shares or alternatively invest in ETFs or mutual funds that track Chinese stock indices for a more straightforward approach.
Related Terms: A-Shares, B-Shares, Shanghai-Hong Kong Stock Connect, Tencent, Qualified Foreign Institutional Investor.
References
- HKEX. “China Dimension”.
- HKEX. “Thirty Years of Market Connectivity”.
- UBS. “China A-Shares: FAQs, Facts, and Figures”.
- HKEX. “Overview of the Listed Market”, Select ‘What Are H-Share Companies?’
- HKEK. “GEM Listing Rules”.
- HKEK. “Main Board Listing Rules”.
- Shanghai Stock Exchange. “Shanghai-Hong Kong Stock Connect”.
- Carpenter, Jennifer N., Fangzhou Lu, and Robert F. Whitelaw. “The Real Value of China’s Stock Market”. NBER Working Papers, February 2015, Page 2.
- HKEK. “Hang Seng China Enterprises Index Futures”.
- HKEK. “HKEK Celebrates 30th Anniversary of H-share Listings”.
- AAStocks. “Indices - H Shares (All)”.
- Nasdaq. “Tencent Holdings Lts. ADR”.
- UBS. “China Market Terminology Explained”.
