What is H-shares?

Explanation

  • The Stock Market in Mainland China is very restrictive and is only open to Chinese people but with lots of restrictions. Not everyone can invest in Chinese equities like in other developed countries. So to ease this situation, the Chinese government came up with this concept.Hong Kong is the Special Administrative Region of the People’s Republic of China. Hong Kong was returned by Britain to China in 1997 when the 99-year lease ended. So unlike China, which is very conservative, Hong Kong’s policies are more liberal, and English is also its official language. Though Hong Kong is part of China, it allowed Hong Kong to govern itself for another 50 years. So policies and stock exchanges are very liberal in Hong Kong.It is difficult for foreigners to trade Chinese shares in exchanges like Shenzhen and Shanghai. So the Chinese government came up with a new policy of allowing public companies of china to list their shares on the Hong Kong exchange also. These shares are called H-shares and can be freely traded by international investors in Hong Kong Dollar (HKD).

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Example

Example #1

  • First Tractor, trading under the local code (00038. HK), is H-share trading on the Hong Kong Stock exchange. The Average Trading price as of 3rd January 2020 is 1.824HKD. So any foreign Investor can easily buy or sell the shares of First Tractor from the Hong Kong Stock Market.First Tractor is a Chinese public company trading in Hong Kong under HKD. It gives free trading rights to the stock, which is not allowed in Chinese exchanges.Investors value Chinese stocks as the most growth stocks. Earlier, when this stock was only traded in Chinese exchanges, foreigners were not allowed to trade in the stock. Now with the concept of H-shares, the First Tractor public ltd company can easily sell its shares to foreigners ready to invest in Chinese stocks.Due to its huge emphasis on manufacturing, China has increased its economy by many folds. It has acted as an attractive investment for many institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples.read more worldwide. These are bridging the gap now.

Example #2

NE Electric is trading under the local code (00042. HK) and is also an H-share, trading under the Hong Kong Stock exchange. The average trading price as of 3rd January 2020 is 0.565HKD.

Index of H-Shares

This Index is the Hang Seng China Enterprises Index. The code is HSCEI. It is a free-float market-capFree-float Market-capFree Float Market Capitalization is a method by which the market cap of an index’s underlying are calculated. It is calculated by multiplying the price with the number of outstanding shares available for investors and traders.read more weighted index. Earlier only H-shares were part of it. Later the Index included Red-Chips and Private Enterprises. The index’s current price is at HKD 11,253 as of 3rd January 2020. This stock indexStock IndexThe stock index, which is also known as the stock market index, is a tool used to determine the performance of shares/securities in the market and to calculate the return on the stock of their investment investors use it to have knowledge about the performance of investments and access the total value they possess.read more helps understand its movement in the Hong Kong Stock Exchange.

H-Shares vs. A-Shares

  • H-shares are the Shares of Public Limited Companies in mainland China that are trading on the Hong Kong Stock exchange. China A-SharesChina A-SharesChina A-shares refers to the stocks of Chinese companies which are traded only in the Renminbi (local currency of China) and listed on the two Chinese stock exchanges, namely Shenzhen Stock Exchange (SZSE) and Shanghai Stock Exchange (SSE).read more are the shares of public limited companies of China trading in Chinese exchanges such as Shenzhen and Shanghai Stock Exchanges.Both types of shares follow the rules of Chinese listing requirements. However, H-shares also abide by the listing requirements of the Hong Kong stock exchange.The Chinese Equity market is very conservative. Several rules prevent foreign investors from directly investing in the Chinese Equity Market. For this reason, investment in A-Shares is very difficult for Foreign Investors. On the other hand, Investment in H-shares is comparatively very easy. Rules that govern the Hong-Kong stock exchange are very lenient compared to those that govern Chinese exchanges.H-shares are far more liquid than A-Shares. It is because foreigners are allowed to trade in H-shares, which makes them more tradable than A-Shares.The price of A-Share is higher as it illiquidIlliquidIlliquid refers to an asset that cannot be converted to cash. Such assets suffer a valuation loss when sold in exchange for cash. Bonds, stocks and properties are some examples of illiquid investment.read more compared to H-share, which is far more liquid.

Conclusion

  • These are extremely important for foreign investors. The conservative equity marketEquity MarketAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE).read more in China was difficult for many investors to invest in. China is an emerging super economy. Many institutions want to invest in China to gain exposure to developing economies.Hong Kong has gained the status of the financial hub of the world. It has helped institutions to gain exposure to companies from different sectors of the Chinese economy. We will see what happens to the Hong Kong economy after 50 years when the “One Country two laws” will merge into “One country one law.” Efforts should be made to liberalize the Chinese economy and merge it with the norms of the Hong Kong economy.

This article has been a guide to What is H-shares & their Definition. Here we discuss the examples of H-Shares and indexes along with differences from A-shares. You can learn more about it from the following articles –

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