Recent policies have effectively established Shanghai, Shenzhen and Hong Kong’s stock exchanges as the exclusive marketplace for publicly traded shares in Mainland Chinese companies. For foreign individual investors who do not hold Chinese citizenship, there are restrictions to trading in the Shanghai and Shenzhen exchanges.
Generally, only financial institutions that have been approved as Qualified Foreign Investors (QFI) from overseas are legally authorized to trade shares listed on Mainland Chinese exchanges, although there are several options available to individual investors, mainly via the Hong Kong Stock Exchange. Individual foreign investors can also purchase Mainland China bonds in Hong Kong through the Bond Connect scheme.
For a long time, purchasing a fund with multiple investments, managed by authorized institutions like banks, insurance companies and securities brokers, was considered the simplest way for foreign individuals to invest in Mainland Chinese markets. The Qualified Foreign Institutional Investor (“QFII”) program was introduced in 2002, in order to enable overseas participation in China’s stock markets, and the Renminbi Qualified Foreign Institutional Investor (“RQFII”) scheme was introduced in 2011 to provide overseas access to bonds and shares in Mainland China with offshore RMB.
The State Administration of Foreign Exchange (SAFE) removed the investment quotas for the QFII and RQFII schemes in 2019, allowing authorized banks, funds and insurance companies to invest an unlimited amount of capital, and the QFII and RQFII schemes were merged and collectively renamed the Qualified Foreign Investor program (“QFIP”) in November 2020, with a streamlined application process, reduced perquisites, and a wider range of eligible investments.
However, there are now more flexible options available to foreign individual investors seeking to trade individual shares listed in Mainland China’s exchanges, and the ideal route differs based on preference and circumstances. The options include purchasing B-shares traded in foreign currencies, purchasing H-shares in Mainland Chinese companies listed on the Hong Kong Stock Exchange (SEHK), purchasing Shanghai and Shenzhen listed A-shares in Hong Kong through the HKEX Stock Connect, and qualifying for exemptions granted to certain foreign nationals working in the People’s Republic of China.
B-shares are stocks in the Shanghai and Shenzhen markets which denominated in Renminbi but processed in US Dollar and Hong Kong Dollar transactions when purchased and sold. B-Shares are specifically designated for foreign individual investors to participate in Mainland China’s markets. Participation in B-Share trading is limited to 54 companies in Shanghai’s exchange, and 55 companies in Shenzhen’s market. These represent a small proportion of the 769 publicly traded companies in the S&P China Broad Market Index.
H-Shares are Mainland Chinese company listings on the Hong Kong Stock Exchange, traded in Hong Kong Dollars. These are often the same stock as companies which simultaneously list their equity in the Shanghai and Shenzhen markets, but they are subject to the local listing regulations in Hong Kong and trading is processed in Hong Kong Dollars. H-Shares usually have a lower price than their counterparts in the Mainland Chinese markets, because they are more easily exchanged. H-Shares are also the only means of trading equity in red-chip companies, which are government-linked Mainland Chinese companies that are incorporated overseas and traded in Hong Kong. There are currently 300 H-Shares listed on the Hong Kong Stock Exchange, 176 of which are red-chip companies which are not traded in Mainland China’s markets.
A-Shares are Renminbi-denominated shares listed on Shenzhen and Shanghai’s stock markets. They are primarily available to citizens of the People’s Republic of China and Qualified Institutional Investors. Purchasing A-Shares is the most direct form of trading in Mainland China’s markets, and therefore the most efficient way for individual investors to capitalize on value created in the Chinese economy. The exchange A-shares is subject to more restrictions than B-Share and H-Share trading, and purchasing A-Shares through the HKEX Stock Connect scheme is generally the only way for foreign individuals to directly purchase A-Shares.
Mutual access between Hong Kong and Shanghai’s markets was established in 2014, with Hong Kong (and overseas) investors granted access to approved A-Shares under the Shanghai-Hong Kong Stock Connect, while Mainland Chinese investors must prepare a minimum investment fund of RMB 500,000 to gain access to the Hong Kong stock market. The Shenzhen-Hong Kong Stock Connect was launched in 2016, broadening the range of shares available to international investors in Hong Kong. However, not all Mainland Chinese shares are available through the Stock Connect programs, and trading is subject to a daily quota.
There are several categories of foreign individuals who are eligible to directly participate in Mainland China’s stock markets. These include:
The Shanghai, Shenzhen and Hong Kong Stock Exchanges will effectively serve as the international window for trading publicly listed shares in China’s stock markets. Foreigners working or residing in China should determine whether their employment or residency makes them eligible for domestic stock market trading, while interested investors should explore the possibilities offered by the Hong Kong Stock Exchange.
The precedent established by recent events has strongly encouraged Chinese companies and interested investors to primarily trade equity within these three markets for the foreseeable future, and foreign investors should clearly understand their options in China. As the domestic economy is projected to expand over the upcoming decade, developing awareness of the unique characteristics of the Chinese markets is key to building a foundation for success in the world’s most important emerging market.
China will head global growth in 2021 and beyond, and we are confident that our clients can benefit from the stock markets and overall economic growth with a proactive, prudent and well-informed approach. We are committed to enabling your success in China, and if you have any enquiries regarding investments or business development, we are always available for a consultation.
About the Author:
Mr. Philip Yu
Mr. Yu holds a Bachelor of Commerce (Hon.) from the University of Toronto and L.L.B. (Hon.) from the University of London, and is a member of the American Institute of Certified Public Accountants, Certified Public Accountants of Australia and the Hong Kong Institute of Certified Public Accountants. Philip is experienced in handling cross border taxation issues, corporate restructuring and other cross border business solutions. He undertakes additional posts as Company Secretary, Authorized Representative and Independent Non-Executive Director for several listed companies on the Hong Kong Stock Exchange. He joined our firm in 2001 and currently the Managing Partner of the firm.
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