China’s stock markets are some of the largest in the world, with total market capitalization reaching RMB 79 trillion (US$12.2 trillion) in 2020. China’s stock markets are seen as a crucial tool for driving economic growth, in particular for financing the country’s rapidly growing high-tech sectors.
Although traditionally closed off to overseas investors, China’s financial markets have gradually been loosening restrictions over the past couple of decades. At the same time, reforms have sought to make it easier for Chinese companies to list on onshore stock exchanges, and new programs have been launched in attempts to lure some of China’s most coveted overseas-listed companies back to the country.
In this article, we introduce the different stock exchanges on the Chinese mainland, how different shares are classified, and what avenues are available for foreign investors to participate in the world’s fastest-growing capital market.
Overview of Mainland China’s stock markets
There are currently two main independently operated stock markets in the Chinese mainland: the Shenzhen Stock Exchange (SZSE) and the Shanghai Stock Exchange (SSE). A third stock exchange in Beijing was also recently announced.
Did you know? On China’s stock markets, red is used for up and green for down.
The Shanghai Stock Exchange
The SSE was the first modern stock exchange to open in China, with trading commencing in 1990. It has now grown to become the largest stock exchange in Asia and the third-largest in the world by market capitalization, which stood at RMB 50.6 trillion (US$7.8 trillion) as of September 2021. Stocks (both A-shares and B-shares), bonds, funds, and derivatives are traded on the exchange.
The SEE has two trading boards, the Main Board and the Science and Technology Innovation Board, the latter more commonly known as the STAR Market. The Main Board mainly hosts large, well-established Chinese companies and lists both A-shares and B-shares.
The STAR Market, as is implied by the name, is heavily geared toward smaller innovative tech companies, in particular those engaged in strategically important fields, such as biopharmaceuticals, 5G technology, semiconductors, and new energy. The STAR Market currently has 340 listed securities.
The STAR Market is seen as important for China’s high-tech and emerging industries, providing a space for smaller companies to raise capital in China. This is especially significant for technology companies that may be viewed with suspicion on overseas stock exchanges.
The SSE is directly administered and run as a non-profit by the China Securities Regulatory Council (CSRC). Companies listed on the SSE are required to submit an annual audited report, as well as quarterly reports, which can be unaudited.
The Shenzhen Stock Exchange
The Shenzhen Stock Exchange (SZSE) is a stock exchange based in the city of Shenzhen in southern China’s Guangdong province. Launched shortly after the SSE, the SZSE has grown to become the seventh-largest in the world, with a market capitalization of RMB 37.4 trillion (US$5.7 trillion) as of September 2021. The SZSE offers trading in A-shares and B-shares, funds, asset-backed securities, bonds, and options.
The SZSE has two main trading boards, the Main Board, and the Growth Enterprise Market (GEM) board, also known as the ChiNext. A previous board, the SME board, was merged with the Main Board in April 2021.
As befits its position in the Greater Bay Area (GBA) region, the SZSE is a magnet for manufacturing companies, which make up a majority of the companies listed on the Main Board (many of these companies were migrated over from the SME board). Many of the companies listed on the Main Board are also state-owned or partially state-owned.
Launched in 2009, the ChiNext mirrors the Shanghai STAR Market, focusing on small up-starts, in particular those in high-tech and emerging industries. In 2020, the CSRC allowed unprofitable companies to list on the ChiNext.
The SZSE is operated and regulated independently under the supervision of the CSRC.
The NEEQ and the upcoming Beijing Stock Exchange
On September 2, 2021, Chinese President Xi Jinping announced the creation of a new stock exchange in Beijing for small and medium-sized enterprises (SMEs). The new board will focus on innovation-oriented companies as a way of boosting strategic emerging and high-tech industries, and to provide a much-needed injection of capital for SMEs.
The Beijing Stock Exchange (BSE) will be 100 percent controlled by the National Equities Exchange and Quotation (NEEQ). The NEEQ, also known as the “New Third Board”, is an exchange for over-the-counter trading of stocks in smaller ‘public limited companies’. It is largely seen as a kind of entry-level system for smaller companies to raise capital before being able to list on the SSE, SZSE, or overseas.
The BSE will be borne out of the NEEQ Select Board. The Select Board is the NEEQ’s highest-tier market dedicated to innovation-oriented SMEs. Companies currently listed on the NEEQ Select will be moved over to the BSE once trading begins.
By the end of 2020, there were 8187 SMEs listed on the NEEQ, raising a total of RMB 33.9 billion (US$5.3 billion) over the course of the year. Access to the NEEQ’s SME stocks is currently only granted to domestic investors and foreign investors designated as Qualified Foreign Institutional Investors (QFII) and Renminbi (RMB) Qualified Foreign Institutional Investors (RQFII). At present, it remains unclear to what extent the BSE will be open to foreign investors, but it is likely it will adopt similar rules to the NEEQ and allow foreign investors to participate through the QFII and RQFII programs.
The opening date of the BSE is yet to be announced.
Overview of Chinese share classes and securities
China’s stock markets offer a variety of different financial products. Shares of Chinese companies are separated into different ‘share classes’. The different classes denote several characteristics, including the trading currency, type of company, location of the listing, and accessibility.
Some companies will list multiple classes of shares or list concurrently on different stock exchanges in order to reach a wider pool of investors. Companies that list on both a domestic and foreign stock exchange will necessarily also be issuing different share classes.
Below we provide a brief overview of the different financial products that investors can trade and the different share classes that Chinese companies (including those incorporated overseas) can issue.
A-shares are RMB-denominated stocks of companies incorporated in the Chinese mainland and listed on one of China’s stock markets.
A-shares have in the past only been accessible to Chinese citizens but have gradually been opened up to outside investors through programs such as the QFII, RQFII, and Stock Connect programs. However, as foreign investors and institutions must meet certain eligibility criteria to participate in these programs, A-shares are still not fully accessible to non-Chinese investors.
A-shares are listed on both the Shanghai and the Shenzhen stock exchanges. A-shares represent the majority of shares listed on China’s stock markets. The electronics giant Midea Group, Fosun Pharma, and the Industrial and Commercial Bank of China (ICBC), all have A-shares listed on domestic stock exchanges.
B-shares are shares issued by companies incorporated in the Chinese mainland on Chinese mainland stock exchanges but denominated in non-RMB currencies. B-shares are denominated in RMB but are traded in U.S. dollars (USD) on the Shanghai Stock Exchange and in Hong Kong dollars (HKD) on the Shenzhen Stock Exchange.
B-shares are open to foreign investors and domestic investors with foreign currency accounts. Examples of companies with B-shares include Hainan Airlines and the real estate giant Vanke, which are listed on the SSE and SZSE respectively.
H-shares are shares issued by companies incorporated on the Chinese mainland and listed on an overseas exchange, most commonly the Hong Kong Stock Exchange (HKEX). H-shares are denominated and traded in HKD and are fully accessible to foreign investors.
There are currently 271 H-shares listed on the Main Board of the HKEX and a further 18 on the Growth Enterprise Market (GEM) board1. Companies with H-shares listed on the HKEX include the likes of CITIC Securities, Tsingtao Brewery, and ZTE Corporation, all of which are incorporated in the Chinese mainland.2
N-shares are shares issued by companies incorporated outside the Chinese mainland and listed on foreign stock exchanges, most commonly U.S. stock exchanges, such as the New York Stock Exchange (NYSE), Nasdaq, and NYSE Market. N-shares traded on U.S. stock exchanges are denominated and traded in USD. Although they are incorporated outside the Chinese mainland, N-share companies must earn most of their revenue in China.
Examples of N-share companies include the likes of Alibaba Group and Baidu Inc., both of which are incorporated in the Cayman Islands and are listed on the NYSE and Nasdaq, respectively.
Red chip shares
Red chips are shares issued by companies incorporated outside of the Chinese mainland and listed on the HKEX. Red chip companies are normally at least partially controlled by the Chinese government but conduct the majority of their business outside of China. Most red chip companies are incorporated in Hong Kong.
Red chip shares are denominated and traded in HKD and are fully accessible to foreign investors.
An example of a red chip company is the electronics giant Lenovo, which is partially owned by the Chinese government and incorporated in Hong Kong.
P chip shares
P chip shares are shares issued by companies incorporated outside of the Chinese mainland and listed on the HKEX. Unlike red chip companies, P chip companies are privately owned. They are also most commonly incorporated in Hong Kong. P chips are denominated and traded in HKD and are fully accessible to foreign investors.
Chinese companies wishing to reach investors in overseas stock exchanges can also choose to do so by issuing depository receipts (DRs). DRs are not technically shares, rather a certificate issued by a bank representing the share of a foreign company. To issue DRs, a portion of a company’s shares listed on an overseas stock exchange is transferred to a custodian bank. The bank can then issue certificates representing the share in the foreign company to investors in the domestic stock market.
The most common DRs are American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). Chinese companies can issue ADRs on U.S. stock exchanges and GDRs on other international stock exchanges, such as the London Stock Exchange (LSE).
Overseas companies who want to float shares on Mainland China’s stock markets can in some cases also do so by issuing Chinese Depositary Receipts (CDRs). This system was introduced primarily to incentivize Chinese companies that are incorporated and listed overseas to raise capital on domestic stock exchanges, but it has also been expanded to non-Chinese companies in some scenarios.
China’s stock exchanges also offer exchange-traded funds (ETFs). ETFs are funds that track different stock exchange indices or assets, such as a commodity, and are traded on stock exchanges in the same way shares are. ETFs provide allow investors to speculate on a whole market or sector, rather than a specific company, and also enable foreign investors to invest in A-shares that are otherwise off-limits by trading composite index funds.
For example, an investor can invest in an ETF that tracks the SSE Composite (SHCOMP), the SSE’s main index, which tracks all A-shares and B-shares listed on the market.
Both the SSE and SZSE offer ETFs for a variety of indexes and assets, such as the iShares Core CSI 300 ETF, which tracks the top 300 companies on the SSE and the SZSE), and the KraneShares CSI China Internet ETF, which tracks some of the top internet companies listed on the SSE and SZSE.
How can foreign investors access China’s stock markets?
Foreign investors can freely trade in Chinese stocks that are listed on overseas stock exchanges, in accordance with the rules of each stock exchange. B-shares and ETFs can be traded through both domestic and foreign brokerage accounts that offer B-shares as a product. Many brokerages in Hong Kong offer B-shares, and many foreign banks and brokerages offer Chinese ETFs.
Participating directly in the A-share market is more strictly regulated. There are currently two ways in which foreign investors and institutions can trade in China’s A-share markets: through the QFII and RQFII programs and the Stock Connect program.
QFII and RQFII programs
The QFII and RQFII programs are a system that allows licensed foreign institutions to trade in A-shares on the Shanghai and Shenzhen stock exchanges.
When first launched, several strict eligibility requirements were imposed on the QFII program, such as a minimum requirement on assets under management (AUM) and investment quotas. The RQFII was introduced later to help push the internationalization of the RMB by enabling investors to use offshore RMB, rather than foreign currencies that are converted to RMB, as required by the QFII program.
Today, the two programs have, for all intents and purposes, been largely consolidated. Regulatory departments have also relaxed eligibility requirements, expanded the scope of available investments, and removed investment quotas.
New measures released in September 2020 combined the requirements for the QFII and RQFII programs, with the updated eligibility requirements and rules defaulting to those of the QFII. The new measures relaxed some eligibility requirements, most notably, removing the minimum AUM requirements and expanding the scope of investments that foreign institutes can participate in.
Under the current rules, a company can apply for QFII status if it meets the following requirements:
- It is financially sound, has a good credit standing, and has experience in securities and futures investment.
- The main person in charge of the business in China meets the requirements for the relevant business qualifications in the applicant’s country or region of origin (if any).
- Has a complete and effective governance structure and internal control and compliance management structure and designates an inspector to supervise the legal compliance of the applicant’s domestic investment activity, as required by regulations.
- Its business conduct is within a normal scope, and it has not received any major punishment from regulatory authorities in the last three years or since its establishment.
- There are no situations in which it could significantly influence the operations of China’s domestic capital markets.
The measures also expanded the scope of financial products that foreign institutes can participate in. The current scope includes, but isn’t limited to:
- Depository receipts
- Bond repurchases
- Interest rates
- Foreign exchange derivatives
- Asset-backed securities traded or transferred on stock exchanges
- NEEQ-listed securities
- Private equity investment funds
- Financial futures
- Commodity futures
In addition, QFII and RQFII-licensed companies can now choose to invest in either RMB or a foreign currency.
Stock Connect program
The Stock Connect program is an investment channel that allows investors in overseas stock markets to trade in A-shares on domestic stock exchanges in the Chinese mainland and vice versa. There are currently Stock Connect programs between Hong Kong and Shanghai, Hong Kong and Shenzhen, and London and Shanghai.
Under the Hong Kong Stock Connect programs, companies can float shares directly on the other stock exchange. Under the London-Shanghai Stock Connect, shares are traded as DRs through designated local brokers. SSE-listed Chinese companies can list GDRs on the LSE, and LSE-listed foreign companies can list CDRs on the SSE.
The Stock Connect program has made it considerably easier for foreign investors to participate in China’s stock markets. Significantly, it allows individual investors to trade in stocks in China through local brokers. There are no requirements for foreign individual investors to participate in the Stock Connect programs, although Chinese individual investors seeking to participate in overseas stock exchanges must meet certain eligibility criteria.
Below are the eligibility criteria for securities and investors to take part in the three Stock Connect programs.
The Stock Connect programs are currently the most common way through which foreign investors participate in China’s stock markets.
Further opening of China’s stock markets to foreign investors
Although China is still considered an emerging stock market by most observers and still imposes much tighter restrictions on market access than other developed markets, recent developments have shown that the country is keen to continue on the path of opening its financial sector to the world.
Recent years have also seen the launch of a host of other programs aimed at strengthening cross-border trading, such as the Bond Connect program with Hong Kong. The CSRC has also said it will continue to explore opportunities to improve and expand the scope of the current Stock Connect programs while strengthening ties with overseas regulators to supervise the listing of Chinese companies on overseas stock exchanges.
Investors interested in trading in Chinese stocks on both Chinese and overseas stock exchanges are advised to closely monitor the latest policy updates and regulations for news on investment channels and rules, in particular those issued by relevant regulatory authorities, such as the CSRC and State Administration of Foreign Exchange (SAFE) in China, the Securities and Exchange Commission (SEC) in the U.S., and the FCA in the U.K.
This article is for information only. Dezan Shira & Associates do not provide financial investment advisory services and are not licensed to do so. We do not accept any responsibility or liability for any transactions made following information provided in this article. Please contact your licensed financial services provider or banker to inquire about such services.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.