The Chinese stock market has been in the news quite a bit lately. When investing, it is important to distinguish what the Chinese stock market actually is. An investor could evaluate several funds with identical percentages allocated to China, but the composition of these exposures could be wildly different.
To start, “China” could refer to any one of three capital markets. There’s developing mainland China (with large stock exchanges in Shanghai and Shenzhen) and then there’s developed Hong Kong, and Taiwan. Firms in both Hong Kong and Taiwan list stock on their local exchanges, but firms based in mainland China can issue several different types of stock:
- There are A-shares, which are listed in Shanghai or Shenzhen and priced in RMB.
- There are B-shares, which are also listed in Shanghai or Shenzhen, but are priced in foreign currencies.
- Then there are H-shares that are listed in Hong Kong and priced in HKD.
- Lastly, we’ve seen a wave of N-shares issued, which are companies who issue stock or ADRs outside of the China region.
Many firms issue several types of shares and these shares often trade at premiums and discounts to one another. Currently, most H-shares trade at a wide discount to the A-shares issued by the exact same companies!
Much of the recent media coverage has focused on A-shares, which experienced a massive rally, then crash, along with some major liquidity issues. The other share classes listed above also rallied and then declined, but not in the same parabolic nature. Although the markets may often be very correlated, the various share classes behave very differently, due to unique investor bases and risk exposures. Given this, it is important for investors to know how much is allocated to China, but also the composition of that exposure.