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China: Making Sense of the
Share-class Alphabet
An Overview of the Chinese Securities Market
PLEASE NOTE: This update represents the views and opinions of our investment team based on market
conditions as of July 10, 2015, and is subject to change as the situation in China continues to evolve.
China’s total equity market makes up making it difficult for US and other foreign investors to access
15% of the world and about 50% of the Chinese stocks that have been driving much of the market’s
performance. Other than through the RQFII and QFII
emerging market universe as measured qualifications that make up 2% of the Chinese equity market,
1 China’s government has made only a small subset of Chinese
by market capitalization. However, stocks available to foreign investors in the form of B-Shares,
for foreign investors, this significant H-Shares, N-Shares, L-Shares, S-Shares and red chips.
growth opportunity was inaccessible As shown in Figure 1, these represent 20% of the investable
Chinese equity market by market capitalization. China’s
as China’s government has historically A-Share market, on the other hand, is much more broadly
limited access to the country’s domestic based — representing all the stocks and sectors traded on
China’s two exchanges. Comparatively, B-Shares, H-Shares,
equity market, also known as the N-Shares, L-Shares, S-Shares and red chips consist of a
2 limited selection of companies and are concentrated in only
“A-Share” market. Instead, only a few sectors. Moreover, the A-Share market has continued to
a small subset of Chinese equities, attract capital infusion from domestic investors as personal
known as B-Shares, H-Shares, wealth in China continues to soar. As Chinese domestic
investors are largely limited to the Shenzhen and Shanghai
N-Shares, L-Shares, S-Shares and stock exchanges, A-Share stocks have tended to trade at
red chips (roughly just 20% of China’s a premium to the same company on the Hong Kong Stock
Exchange, where companies have dual listings.
total equity market) had been made
available to foreign investors. It is estimated that 90% of all trading on
the domestic exchanges in China are from
International access to the local China A-Share market— retail investors.4
roughly 80% of China’s overall equity market—has become more
readily available due partly to Chinese policymakers’ push for
market liberalization. Foreign investors authorized as Qualified Qualified Foreign Institutional
Foreign Institutional Investors (“QFIIs”) and Renminbi QFII Investor (QFII)
(“RQFII”), gained access to the A-Share market in 2002 and In 2002, the Chinese government — attempting to spur further
2011 respectively allowing the creation of new products to offer investment in its equity markets — began issuing investment
Chinese equity exposure. Currently, the total quota available via quotas, allowing “qualified institutional investors” to access the
QFII and RQFII programs stands at almost 2% of China’s total A-share market. Through offshore currency accounts, licensed
market capitalization; with plans to increase this to 10–15% in QFII are able to invest in A-Share equities, bonds, index
the next few years.3
According to the Chinese government, these futures, warrants, open/closed-end funds and ETFs on both
investment quotas are designed to regulate foreign investment the Shanghai and Shenzhen exchanges.
and prevent massive outflows during market downturns.
Approved QFII applicants must meet strict criteria by the
China’s A-Shares China Securities Regulatory Commission (CSRC), including
minimum thresholds of capital, years of business experience,
The Domestic Onshore Market and assets under management.
Many companies listed on the Shenzhen and Shanghai stock The total QFII quota currently stands at RMB467.2bn
exchanges are not listed on other international exchanges, (USD$75.5bn).5
China: Making Sense of the Share-class Alphabet
Renminbi Qualified Foreign Institutional
Investor (RQFII) A, H,…N?
Launched in 2011, the Renminbi Qualified Foreign Institutional
Investor (RQFII) program is an extended version of QFII — Learning the Chinese
facilitating foreign investment in the mainland via offshore Investing Alphabet
renminbi accounts. RQFII participants can invest in the same
range of investment products and are subject to many of the Investors new to China are frequently bewildered by the
same restrictions as QFII participants. However, a RQFII dizzying array of share classes: A, H, red chips, p chips,
uses renminbi to purchase securities, while a QFII uses their “dragons”…the list goes on. However, only a handful of the
foreign home currency. share classes are truly relevant. The China H exchange
At launch, the RQFII program was limited to only Hong Kong comprises stocks listed in Hong Kong. It’s an older market
subsidiaries of Chinese financial institutions. But over the than China A (opening in the early 1980s, versus 1990 for
past two years, the license has been extended to additional A), and importantly, has always been open to investment
Hong Kong banks and asset managers as well as to financial from international investors. China A is only now
institutions in locations such as London, Singapore and Taiwan. widening its scope. For that reason, China H is actually
The total RQFII quota stands at approximately treated as a developed market, and correlations between
RMB382.7bn (USD$61.8bn).6 China H and other markets are much higher.
While some stocks are dual- listed on China A and China H,
Hong Kong ≠ China China A’s constituency — whether government-owned (red
chips) or not (p chips) — is overall much more domestic-
(At least in terms of its China stock exposure) driven. China A offers relatively fewer financial stocks, and
Popular forms of gaining exposure to Chinese equities have more consumer ( both discretionary and staples),
included H-Shares, which are Hong Kong-listed Chinese stocks, information technology and health care stocks — the exact
or through Hong Kong companies; however, neither of these sectors that will benefit most from the Chinese domestic
avenues provide complete or accurate representations of the growth story. However, many of the hot, mainland-based
Chinese equity market. H-Shares only comprise 13% of China’s online retail or other tech companies (including retailing
equity market by market capitalization (Figure 1). Moreover, giant Alibaba), have increasingly chosen to list in New York
the Chinese companies listed on international exchanges, (N share), either on the New York Stock Exchange or
such as Hong Kong and New York, represent more mature NASDAQ.
corporations that may be more susceptible to movements in
the global market. Additionally, Hong Kong stocks do not
provide exposure to the Chinese economy.
Since Britain relinquished control of the Hong Kong territory 1 World Federation of Exchanges, May 2015.
in 1997, Hong Kong has been a separate entity governed as a 2 Shanghai Stock Exchange and Shenzhen Stock Exchange, as of March 31, 2015.
3 Source: Shanghai Stock Exchange (2015, March 30). Retrieved from http://english.sse.com.cn/
special administrative region. Today, Hong Kong retains its investors/home/
own legal system, a high degree of autonomy, a “national” 4 Source: Cheung, Christopher; Hoguet, George; and Ng, Sunny. Value, Size, Momentum,
currency and a major capitalist service economy. Moreover, Dividend Yield, and Volatility in China’s A-Share Market. The Journal of Portfolio Management,
Hong Kong is a developed market, with half of its economic 41, No. 5: pp. 57-70.
activity geared toward global business and financial services. 5 Reuters, May 29, 2015: China’s QFII quota rises to $75.54bln in June (http://www.reuters.com/
article/2015/06/30/china-investment-qfii-idUSB9N0YB01420150630).
In addition, Hong Kong’s economy is highly dependent on its 6 Bloomberg, List of 129 China RQFIIs as of May 2015 (http://www.bloomberg.com/
7 offshorechina/rqfii/).
export business, which comprises 230% of GDP. In contrast,
developing China exports 26% of its GDP and is driven by local 7 World Bank, October 2014.
trends and growing domestic consumption.8 8 World Bank, October 2014.
These differences
are further illustrated by the relatively low correlations
between the Hang Seng Hong Kong Composite Index (the
total market benchmark for Hong Kong), and the CSI 300 Index
(China’s leading equity benchmark). As of 30 June 2015, 3- and
5-year correlations for the Hang Seng Hong Kong Composite
Index and the CSI 300 Index were 0.40 and 0.43, respectively.
State Street Global Advisors 2
China: Making Sense of the Share-class Alphabet
Figure 1: Comparison of the Chinese Investing Alphabet
H-Shares
A-Shares B-Shares N-Shares H-Shares Red Chips L-Shares* S-Shares
The onshore domestic market A subset of the full A subset A subset A subset of A subset of the A subset of
providing full representation of all largecap market traded of the full of the full directly or full small-cap the full small
stocks and sectors traded in foreign currency market market indirectly market traded to mid-cap
in China trading on traded in HK controlled GBP in London market traded
exchange in government in SGD in
the US stocks traded Singapore
in HK
Stock Shanghai Shenzhen Shanghai Shenzhen NYSE, Hong Kong Hong Kong London Singapore
Exchange Shenzhen ChiNext NASDAQ
Exchange Exchange
# of 1058 1696 464 53 51 154 186 138 60 179
Constituents
Market Cap $5.9tn $4.4tn $15.8bn $23.9bn $19bn $825bn $853.5bn $781.7bn $27.8bn $1.5bn
(USD)
Breakdown All All Small-Mid Large All Mid-Large Small Small-Mid
Currency RMB Foreign Currencies USD HKD GBP SGD
Available to PRC citizens & foreign PRC citizens & All investors All investors All investors All investors
investors who have been foreign investors
approved as QFII or RQFII
Source: Shanghai Stock Exchange, Shenzhen Stock Exchange, Hong Kong Stock Exchange, New York Stock Exchange, World Federation of Exchanges. May 2015. *London
statistics from October 2014.
Stock Connect and Beyond: During the time of launch, these plans fueled a huge market
Broader Reach into China for rally on both exchanges. Regulators from China and Hong
Kong have moved cautiously, highlighting the difficulties in
Retail and Institutional linking up two systems at varied stages of progress under
Investors Alike one unified program. An extension of this Stock Connect
to include the Shenzhen Stock Exchange is scheduled for
In an effort to further relax controls on capital flows into late 2015.
and out of the country, China introduced a new trading link One additional touch point for investors is the addition of
between Shanghai and Hong Kong in November 2014. Known mainland China stocks into the MSCI EM Index (The
as the “Stock Connect”, this program created a channel MSCI Emerging Markets Index captures large and mid cap
through which investors outside mainland China can trade representation across 23 Emerging Markets (EM) countries).
and settle equity securities through Hong Kong brokerage In June, MSCI announced that it would hold off from adding
accounts. At the same time, this “Express,” or “through China A stocks to its benchmark indexes, saying that
train,” as it is known, also began operating a “southbound progress has been made but China needs to resolve “a few
route,” making it easier for mainland investors to invest in important remaining issues related to market accessibility.”
more than 1,400 companies listed on the Hong Kong stock When, eventually, passive flows move into China A-shares
exchange. The Hong Kong-Shanghai Connect now gives following their expected inclusion in MSCI EM, there will
anyone with a Hong Kong brokerage account the ability to clearly be a tailwind, which should figure on top of the
tap an aggregate daily quota open to all market participants. diversification that China A shares provide through their
exposure to the domestic Chinese economy.
State Street Global Advisors 3
China: Making Sense of the Share-class Alphabet
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