What Are China A-Shares? China A-Shares Definition. China A-Shares vs. B-Shares
China A-shares are the stock shares of mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). Historically, China A-shares were only available for purchase by mainland citizens due to China’s restrictions on foreign investment.
However, since 2003, select foreign institutions have been able to purchase these shares through the Qualified Foreign Institutional Investor (QFII) system. Established in 2002, the QFII program allows specified licensed international investors to buy and sell on mainland China’s stock exchanges.
A-shares are also known as domestic shares because they use the Chinese renminbi (RMB) for valuation.
The efficiency of China A Shares
In the past few years, China has outgrown itself from a developing economy to a developed economy. It is one of the reasons that has led to a significant rise in the demand for Chinese securities. It is no denial that China is the second-largest securities market in the world. Around 14% of the international stock market is represented by China’s 9 trillion USD securities market.
China’s stock market can be segmented into the domestic and offshore securities market, i.e., China A-shares and B – shares. China’s 6 trillion USD domestic stock market represents China A-shares, whereas 3 trillion USD offshore stock market represents China B-shares. The efficiency of A-shares accounts for around 65% of the national stock market of China. The companies that have originated and incorporated in China mostly issue these shares.
China A-Shares vs. B-Shares
China A-shares are different from B-shares. A-shares are only quoted in RMB, while B-shares are quoted in foreign currencies, such as the U.S. dollar, and are more widely available to foreign investors. Foreign investors may have difficulty accessing A-shares because of Chinese government regulations, and Chinese investors may have difficulty accessing B shares most notably for currency-exchange reasons. Some companies opt to have their stock listed on both the A-shares and B-shares market.
Due to the limited access of Chinese investors to B-shares, the stock of the same company often trades at much higher valuations on the A-shares market than on the B-shares market. Although foreign investors may now invest in A-shares, there is a monthly 20% limit on repatriation of funds to foreign countries.
The Shanghai Stock Exchange (SSE) publishes the key performance index for A-shares, known as the SSE 180 Index. In composing the index, the exchange selects 180 stocks listed on the SSE. The selection is diversified between sector, size, and liquidity to ensure adequate representation. Thus, the index’s performance benchmark reflects the overall situation and operation of the Shanghai securities market.
Why is China A-Shares issued?
Following are a few reasons as to why the entities incorporated in China choose such shares:
- Higher Accessibility
- Diversification Feature
- Level of Liquidity
- Value Bargain Factor
- Apart from all these efficiencies, it also offers an alternative investment plan for investors planning to trade in Chinese securities.
History of China A-Shares
Since its inception in 1990, including a major reform in 2002, the index has seen great fluctuations. However, it has grown along with the Chinese economy. The years 2015 to 2016 were a particularly difficult period, with a 52-week performance of -21.55% as of July 20, 2016.
As China grows from an emerging market to an advanced economy, there is substantial demand for Chinese equity. Stock exchange regulators continue efforts to make A-shares more broadly available to foreign investors and have them recognized by the global investing community.
In June 2017, the MSCI Emerging Markets Index announced a two-phase plan in which it would gradually add 222 China A large-cap stocks. In May 2018, the index began to partially include China large-cap A shares, which make up 5% of the index. Full inclusion would make up 40% of the index.
It is important for countries such as China to open their markets to global investors to stay competitive and thrive economically. China A-shares provide an alternative investment for those interested in trading in Chinese securities.
How to Invest in China A-Shares?
Making investments in international institutional companies is difficult and risky at the same time. The investors might have to face risks of currency, volatility, transparency issues, regulatory issues, war, corruption, and so on. There are various types of logistical challenges, too that are faced by international institutional investors. Purchasing of China A-shares might require international investors to open a brokerage account and that also, with a company incorporated in China. It might be optional if the U.S. brokerage account of the foreign investor permits so. International institutional investors can even purchase shares in an exchange-traded fund or ETF to invest in such shares.
Following are the few steps with which an international investor can invest-
- Find out the stocks that are available and suitable.
- Get in touch with a broker or an investment service for the purchase.
- Buy China A-shares