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. Foreign Investors can buy such shares freely like other equities in Hong-Kong stock Exchange. This was a huge relief for International Investors. 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.
- 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 in the 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 that is trading in 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.
- So First Tractor is a Chinese public company but is trading in Hong Kong under HKD. It gives free trading rights to the stock, which is not allowed in Chinese exchanges.
- Earlier, when this stock was only trading 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 who are ready to invest in Chinese stocks. Investors value Chinese stocks as the most growth stocks.
- China, due to its huge emphasis in the manufacturing sector, has increased its economy by many folds. It 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 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-cap weighted index. Earlier only H-shares were part of it. Later the Index included Red-Chips and Private Enterprises. The current price of the Index is at HKD 11,253 as of 3rd 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 that are trading in the Hong Kong Stock exchange. China A-Shares 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. There are several rules which prevent foreign investors from investing in the Chinese Equity Market Directly. For this reason, investment in A-Shares is very difficult by Foreign Investors. On the other hand, Investment in H-shares is comparatively very easy. Rules that govern the Hong-Kong stock exchange is very lenient compared to the rules 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 the H-shares more tradable than A-Shares.
- The price of A-Share is higher as it illiquid as compared to H-share, which is 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 an 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. 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.” 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.
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