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Navigating the Chinese share menu

If you’re an investor and want some exposure to China’s fast-growing economy in your portfolio, you just buy Chinese shares, right?

Unfortunately it’s not as simple as that.

Although China is now the world’s second largest economy and its largest trading nation, the country’s regulators have historically limited the interaction of China’s financial markets with those in the rest of the world.

As a result of these controls on capital flows, foreign investors couldn’t just buy into the shares listed on China’s mainland stock exchanges, while Chinese investors weren’t free to invest overseas either.

This doesn’t mean that overseas investors couldn’t access Chinese shares at all. Chinese companies have been listing their shares in Hong Kong, an open financial market (and now a special administrative region of China) since the early 1990s in the form of so-called “H-shares”.

But the main form of domestic equity, the Chinese “A-share”, introduced in 1990, was originally available for purchase by domestic investors only. Since 2002, foreigners have been able to access the A-share market, but only under a restrictive quota system.

By contrast, “B-shares”, another form of mainland-listed share of domestic companies, were introduced in 1991 specifically for sale to offshore investors (and were denominated in foreign currencies for this purpose).

The menu of Chinese share classes doesn’t end there. It includes so-called “Red chips” and “P-chips”, both forms of company incorporated outside China but with some form of control from the mainland.

Other categories of share include companies listed in Singapore (S-chips), New York (N-shares) or London (L-shares) that have one thing in common: substantial business operations in mainland China.

FTSE’s indexes incorporate and cover all these share classes and are used as the underlying benchmarks for some of the largest China-related tracker funds. The world’s largest offshore Chinese equity ETF and the largest A-share ETF both aim to replicate FTSE indexes.

China’s system of capital controls is now being relaxed, and at an accelerating pace. But for the time being investors have to choose between a variety of Chinese share types. 


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