H-Shares Definition | (Examples, Index) What is H-Shares?

What is H-shares?

H-Shares is a class of share of a public company from Mainland China that trades in Hong-Kong Stock exchange in Hong Kong Dollar and Foreign Investors can buy such shares freely like other equities in Hong-Kong stock Exchange. This was a huge relief for International Investors as earlier they were not allowed to buy shares of public companies in China trading under Shenzhen or Shanghai Stock exchanges unless they were Qualified Foreign Institutional Investors.

Explanation

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-years 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.
As it is difficult for foreigners to trade Chinese shares in exchanges like Shenzhen and Shanghai, so Chinese government came up with a new policy of allowing public companies of china to list their shares in Hong Kong exchange also. These shares are called H-shares and can be freely traded by international investors in Hong Kong Dollar (HKD).

Example

Example #1

First Tractor which is trading under the local code (00038.HK) is an H-share which is trading in the Hong-Kong Stock exchange. The Average Trading price as of 3^rd 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.
So First Tractor is a Chinese public company but is trading in Hong Kong under HKD. This gives free trading rights to the stock which is not allowed in Chinese exchanges.
Earlier when this stock was only trading in Chinese exchanges, then 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 who are ready to invest in Chinese stocks. Chinese stocks are being valued as the most growth stocks.
China due to its huge emphasis in the manufacturing sector has increased its economy by many folds. This has acted as an attractive investment for many institutional investors worldwide. These are bridging the gap now.

Example #2

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

Index of H-Shares

This is the Hang Seng China Enterprises Index. The code is HSCEI. It is a free-float market-cap weighted index. Earlier only H-shares were part of the Index but later Red-Chips and Private Enterprises were also included in the Index. The Index is currently priced at HKD 11,253 as of 3^rd January 2020. This stock index helps to understand its movement in the Hong Kong Stock Exchange.

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H-Shares vs A-Shares

H-shares are the Shares of Public Limited Companies of mainland China which are trading in the Hong Kong Stock exchange. China A-Shares are the shares of public limited companies of China and are trading in Chinese exchanges such as Shenzhen and Shanghai Stock Exchanges.
Both types of shares follow the rules of Chinese listing requirements, but H-shares also abide by the listing requirements of the Hong Kong stock exchange.
The Chinese Equity market is very conservative, there are several rules which prevent foreign investors to invest in Chinese Equity Market Directly. For this reason, investment in A-Shares is very difficult by Foreign Investors and on the other hand Investment in H-shares is comparatively very easy as the rules that govern Hong-Kong stock exchange is very lenient compared to the rules that govern Chinese exchanges.
Thes are far more liquid than A-Shares. This is because foreigners are allowed to trade in H-shares which makes the H-shares more tradable than A-Shares.
The price of A-Share is higher as it illiquid as compared to H-share which are far more liquid.

Conclusion

These are extremely important for foreign investors. The conservative equity market in China was difficult for many investors to invest in. China is the emerging super economy. Many institutions want to invest in China to gain exposure to developing economies.
It has helped institutions to gain exposure to companies from different sectors of the Chinese economy. It will have to be seen what happens to the Hong Kong economy when after 50 years the “One Country two laws” will merge into “One country one law”. Hong Kong has gained the status of the financial hub of the world. Efforts should be put in to liberalize the Chinese economy and merge it with the norms of the Hong Kong economy.

H-Shares