As a would be investor we often hear about the wonderful growth opportunities available by investing in Chinese companies. I recently came across this very good summary of Chinese share structures. Potential investors should be aware of the information in the article by Rich Powers (linked below) but for our purposes I have summarised the key points.
Source article: Rich Powers - Vanguard
Among the emerging market investment options have been the continued opening of the mainland Chinese stock markets to foreign investment. China A-shares, sold on the mainland, traditionally had been available for purchase only by Chinese citizens. Chinese regulators want more foreign capital in their markets, and they are, more and more, opening up the Shanghai and Shenzhen exchanges to foreign investors through several pathways, such as the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor programs. That is a significant and historic change.
China A-shares have been included in some indexes for a few years but the index weightings will significantly increase in most available ETFs over the next couple of years. Any ETF one is considering will have the A-share weighting disclosed. Examples include MSCI, which has decided to add some China A-shares in its comparable emerging markets index, and FTSE has decided to expand its emerging markets index to include other types of Chinese shares, known as N-shares and S-chips.
Emerging markets investors already had access to Chinese companies through Hong Kong. Why is it important to add in these other types of shares?
China has the world’s second-largest GDP. It accounts for 20% of global trade and 7% of global consumption. It has the second-largest stock market in the world by market cap.1 Adding in the other types of shares provides a more accurate reflection of the Chinese market. The Chinese market is not fully open to foreign investment, but to the degree that it is, an emerging markets index, and products that track it, should reflect that.
Emerging markets investors already had access to Chinese companies through Hong Kong. Why is it important to add in these other types of shares?
China has the world’s second-largest GDP. It accounts for 20% of global trade and 7% of global consumption. It has the second-largest stock market in the world by market cap.1 Adding in the other types of shares provides a more accurate reflection of the Chinese market. The Chinese market is not fully open to foreign investment, but to the degree that it is, an emerging markets index, and products that track it, should reflect that. Overall the world we can access is getting broader while the costs to invest are getting lower.
How do index providers construct their indexes using Chinese shares?
When weighting for market cap, index providers take into account not only the percentage of shares available to the public but also the percentage of shares available to foreign investors. Index providers, however, take differing views on types of shares, countries, or even individual companies. Tangible differences in indexes can lead to differences in performance for products that track those indexes.
Right now, the FTSE Emerging Markets All Cap China A Inclusion Index provides a 29% weight to Chinese stocks. That currently includes about 5% to China A-shares. If the full market cap of China's A-shares and other types of Chinese shares were included, China would make up 50% of the emerging markets index.3 That's a lot, and we're a long way from that happening. If Chinese markets were fully open to foreign investment, then I would think index providers would move toward a full market-cap representation of the Chinese equity market.
Why does China have all these types of shares?
Stock trading is not new to China. The Shanghai Stock Exchange opened in 1890, although it wasn't until much later that the Chinese stock markets evolved into international players. Red-chips, which are shares of state-owned enterprises, were first listed in Hong Kong in 1972. In 1990, the Shanghai exchange was reconstituted using A-shares. After that came N-shares, which are Chinese companies listed on New York exchanges, as well as H-shares and P-chips in Hong Kong and S-chips in Singapore. There are nuances to each. P-chips, for example, are private companies incorporated in foreign jurisdictions, such as the Cayman Islands or Bermuda.
As always it's important to be aware of your information source
A-shares are a more diversified market that better reflect the Chinese economy. H-shares tilt more heavily to financial companies.
I hope the above information hasn't confused you but has hopefully served as a good intro. Also be aware that A-Shares are listed concurrently in Hong Kong and Shanghai and there is a pricing difference between various investment vehicles available.