Overview of the Chinese Stock Market
A lot of people want to invest in China because China has the 2nd largest economy in the world as measured by total gross domestic product and China's economy at times grows at a fast pace, especially when the Chinese government stimulates the economy with massive infrastructure spending. Unfortunately, the Chinese stock market is complex, and sometimes difficult to understand. This page will attempt to clarify how the Chinese stock market works.
China's internal markets
China has 3 major stock markets:
- Shanghai
- Shenzhen
- Hong Kong
The Shanghai and Shenzhen stock exchanges represent China's "internal" stock markets. Historically, the Chinese government has wanted to isolate these markets from foreign investors, although the restrictions have been softened in recent years.
Mechanically, the way the government restricts outsiders from directly buying shares in these internal markets is by requiring Chinese companies to create special classes of common stock - some that can be owned by foreigners and some that can only be owned by Chinese. It's a concept unique to China.
Common stock shares known as "A shares" are traded in the Shanghai and Shenzhen markets and historically were only available to local Chinese investors. A shares are traded in the Chinese currency (the Renminbi).
Companies in these markets can also issue "B shares". B shares are common stock shares that are open to both Chinese mainland and foreign investors, and actually trade in a foreign currency. B shares trade in the US dollar in Shanghai and in the Hong Kong dollar in Shenzhen. Chinese citizens can buy B shares but obviously must have a foreign currency account to do so.
The B shares were supposed to be the way that foreigners would invest in Chinese companies, but the concept never really took off. Starting in the early 2000's, the Chinese government started to allow some foreign investors to buy A shares. Foreign institutional investors can buy A shares if they can qualify under one of two programs created by the Chinese government. But there are limits to these programs in terms of who can get a special license and how much they can trade on the exchanges.
But the primary way that foreigners can now buy A shares is using the "stock connect" program that exists between the Hong Kong, Shanghai and Shenzhen stock exchanges. The stock connect program started in 2014 and allows international and mainland Chinese investors to trade securities in each other's markets through the trading and clearing facilities of their home exchange. But not all A shares are included in the stock connect program, so access to A shares is still not totally open.
The Shanghai Composite Index is the most common index that outsiders use to track the Shanghai stock market. Shenzhen is the smallest of China's 3 markets, so most outsiders tend to just look at the Shanghai Composite Index to measure how well the "internal" stock markets are doing.
Keep in mind that many of the Chinese companies traded on the internal stock markets are unique, in that they are government owned, with a minority portion of their stock traded on a public stock market. This is a result of China's economic policies that are unique in the world - a blended mix of limited economic freedoms within a communist country.
Hong Kong market
Until the year 1997, Hong Kong was a British colony with a thriving local, private economy. When communist China took ownership in 1997, Hong Kong became one of the most unique places in the world, as China has allowed Hong Kong to continue most of it's previous economic policies, yet it is owned by a communist government. The Hong Kong stock market, which existed before 1997, reflects this unique history and status in the world.
The Hong Kong stock market is unique because it is made up of a combination of:
- Companies that are incorporated in Hong Kong and considered to be "Hong Kong" companies and not "Chinese" companies
- Hundreds of Chinese companies that have A shares listed on the internal markets that have also chosen to list "H shares" on the Hong Kong stock market
- Hundreds of Chinese companies that are only listed on the Hong Kong stock market
Many Chinese mainland companies with A shares also list their H shares in the Hong Kong stock market. This is primarily due to the desire to allow greater access to foreign investors, as there are no restrictions as to who can buy H shares on the Hong Kong market. Note that a Chinese company cannot issue both B and H shares. B shares were supposed to be the primary way for Chinese companies to reach out to foreign investors, but it never really turned out that way. H shares have become way more popular than B shares, which in a way undermined the whole point of the B share program. It is unclear what will happen to B shares going forward. A Chinese company can convert their B shares to H shares, but apparently it is not easy.
The Chinese companies that are only listed in Hong Kong consist of two types:
- State-owned Chinese companies that are incorporated outside the mainland (mostly in Hong Kong) with a majority of its revenue or assets derived from mainland China. These companies are referred to as "Red chips".
- Privately owned Chinese companies that are incorporated outside the mainland and with a majority of its revenue or assets derived from mainland China. These companies are referred to as "P chips".
Hong Kong as a country
Despite its official status as a province or region owned by China, Hong Kong is still considered to be a "country" by most index providers. So companies that are incorporated in Hong Kong or have their primary security listed in Hong Kong are classified as being from the country of Hong Kong, not China. Hong Kong, the "country", is considered by most index providers to be a "developed market", whereas China is considered to be an emerging market.
EWH, the iShares MSCI Hong Kong ETF, tracks an index of Hong Kong stocks only. Here is a comparison of EWH's performance to that of the Shanghai Composite Index:
One of the most common indexes used to track the Hong Kong stock market is the Hang Seng Index. The Hang Seng Index, which includes the largest and most liquid stocks on the Main Board of the Stock Exchange of Hong Kong, includes both Hong Kong and Chinese companies.
Chinese ADRs listed on U.S. stock exchanges
There are currently 97 Chinese companies that have shares traded on U.S. stock exchanges through American Depository Receipts or ADRs. An ADR is one way for a non-U.S. company to trade shares on the U.S. stock market. You can look at them by visiting our list of ADRs. In terms of the number of securities, China accounts for the largest number of ADRs of any country in the world.
An ADR is evidence of ownership of the common stock of a foreign company. The common stock can be either privately held or publicly traded somewhere in the world. Although a Chinese company that has an H share traded in Hong Kong can also have an ADR traded in the U.S, many times the ADR traded in the U.S. is the company's only publicly traded security.
Chinese companies directly listed on U.S. stock exchanges
To confuse matters more, there are 94 Chinese companies that directly trade on a U.S. stock exchange, without using an ADR. These are similar in nature to P chips, in that they are privately owned companies that are judged to be a "Chinese" company, but they have chosen to have their primary stock trade on a U.S. stock exchange (rather than in Hong Kong). What makes a company traded on a U.S. stock exchange a "Chinese company"? Some index providers will include in their "Chinese index" any company that is traded on a U.S. stock exchange, derives over 50 per cent of the revenue or assets of the company from China, and is controlled by a mainland Chinese entity, company or individual. These companies are sometimes referred to as "N shares".
See also our list of Chinese companies that trade on U.S. stock exchanges.
Notable ETFs
In summary, there are basically three "buckets" of Chinese companies: Chinese companies traded on U.S. stock exchanges (mostly ADRs), Chinese companies traded in Hong Kong, and Chinese A and B shares traded in Shanghai and Shenzhen (with the B shares not being that important). There are U.S. ETFs that track indexes that are tracking each of these buckets:
| Name | Symbol | Last price | Currency |
|---|---|---|---|
| Matthews International Funds Matthews China Active ETF | ARCX:MCH | 22.42 | USD |
| Deutsche X-trackers Harvest CSI 500 China A Shares Small Cap | ARCX:ASHS | 28.93 | USD |
| Guggenheim Invest China Technology | XNYS:CQQQ | 41.02 | USD |
| Market Vectors ChinaAMC SME-ChNext ETF | ARCX:CNXT | 28.83 | USD |
| Franklin FTSE China ETF | ARCX:FLCH | 18.58 | USD |
| iShares MSCI China A | BATS:CNYA | 28.29 | USD |
| Xtrackers Harvest CSI 300 China A-Shares | ARCX:ASHR | 26.75 | USD |
| iShares MSCI China Small-Cap ETF | ARCX:ECNS | 25.52 | USD |
| KraneShares SSE STAR Market 50 Index ETF | ARCX:KSTR | 13.51 | USD |
| Kraneshares MSCI China Environment | ARCX:KGRN | 22.63 | USD |
| KraneShares Bosera MSCI China A ETF | ARCX:KBA | 23.38 | USD |
| VanEck Vect ChinaAMC China Bond ETF | ARCX:CBON | 22.16 | USD |
| SPDR S&P China ETF | ARCX:GXC | 77.89 | USD |
| Global X MSCI China Consumer ETF | ARCX:CHIQ | 19.76 | USD |
| PowerShares Golden Dragon China Port | XNAS:PGJ | 26.44 | USD |
| iShares MSCI China ETF | XNAS:MCHI | 47.10 | USD |
| iShares China Large-Cap ETF | ARCX:FXI | 30.38 | USD |
| KraneShares MSCI All China Health Care | ARCX:KURE | 14.43 | USD |
| Rayliant Quantamental China Equity ETF | ARCX:RAYC | 14.81 | USD |
| KraneShares Hang Seng TECH Index ETF | ARCX:KTEC | 13.65 | USD |
| KraneShares CSI China Internet | ARCX:KWEB | 29.92 | USD |
| Wsdmtr Tr Wsdo | XNAS:CXSE | 30.41 | USD |