Chinese Equities and the Hong Kong Stock Market

Investors can access the Chinese equity market via several share classes, the largest being A-shares. A-shares are companies listed on the Shanghai and Shenzhen stock exchanges. H-shares on the other hand are listed on the Hong Kong stock exchange. With the “Stock Connect” schemes, investors outside of mainland China can now use the Hong Kong Exchange to buy A-shares in Shanghai or Shenzhen (known as ‘northbound’ trades) . On the other hand, Mainland China residents can use the Shanghai or Shenzhen exchanges to buy H-shares or Hong Kong-listed stocks (known as ‘southbound’ trades). That Chinese equities and the Hong Kong Stock Market will have a major role to play in Post-Pandemic times is undeniable. 

China’s Economy

Under the socialist-market model, the Chinese Government directly manages the economy through its five-year plans that set goals, strategies and targets. The five-year plans in the 1980s and 1990s concentrated on market-oriented reforms. In contrast, the past two five-year plans have emphasised promoting more balanced growth, equitable wealth distribution and better environmental protection. The current five-year plan places an accent on increasing China’s competitiveness via more efficient and increasingly advanced manufacturing on the east coast, pulling labour-intensive manufacturing to central provinces, thereby increasing domestic demand.

Economic growth, which has thus far been driven by export-led manufacturing, is now more reliant on domestic consumption. The consequent increase in consumption spending stands as a prime opportunity for foreign businesses that are able to successfully target their products and services to a wealthier Chinese public. There is also encouragement for foreign businesses to invest in key areas – advanced manufacturing, energy saving, environmental protection. Tightened regulation on energy conservation and environmental protection also presents an opportunity for international businesses.

The projection of China since the 1980s as a low-cost manufacturing hub, where it effectively served as an inexpensive producer for global brands, is transforming as the economy grows. Increasing labour costs and an ageing workforce have caused manufacturers’ profits to contract.

Consequently, while cost rationalisation is still the dominant feature of the China market, global and local businesses are now starting to change strategies to tap China.

Businesses considering establishing operations in China should be aware that, notwithstanding long-held perception, average wages in China have been ascending to the point where it is no longer a low-cost hub.

Average real wages in State-owned and other urban-based enterprises expanded by 9 per cent in

2016, while those of workers in private enterprises ascended 8 per cent in 2016. Reflecting the Chinese ‘boom’ was the more-than trebling of the average annual salaries of city workers. Accompanying this new wealth, however, were steeply increased living costs.

What are China A shares?

China A-shares are the stock shares of mainland China-based companies trading on the two Chinese stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). Traditionally, China A-shares were only available for purchase by mainland citizens due to China’s foreign investment restrictions.

China A-shares vs B shares

China A-shares are Not in the same league as B-shares. A-shares are only quoted in RMB, while B-shares are quoted in foreign currencies, for instance, the U.S. dollar. These are more widely available to foreign investors. The latter may have problems accessing A-shares because of Chinese government regulations. Similarly, Chinese investors may have issues accessing B shares, most notably for currency-exchange reasons.

Some companies choose to have their stock listed on both the A-shares and B-shares

market. Because of the limited access of Chinese investors to B-shares, the same company stock often trades at much higher valuations on the A-shares market than on the B-shares market.

Notwithstanding foreign investors now investing 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, called 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 guarantee adequate representation. Therefore, the index’s performance benchmark reflects the overall situation and operation of the Shanghai securities market.

History of China A-shares

Since its beginnings in 1990, including a major reform in 2002, the index has undergone great fluctuations. However, it has grown conterminously with the Chinese economy. 2015 to 2016 were an especially challenging period, with a 52-week performance of -21.55% as of July 20, 2016.

As China grows into an advanced economy, there is considerable demand for Chinese equity. Stock exchange regulators keep up their efforts to make A-shares more broadly available to foreign investors and recognised by the global investing community.

In June 2017, the MSCI Emerging Markets Index announced a two-phase plan to gradually add 222 China A large-cap stocks. In May 2018, the index began the partial inclusion of China large-cap shares, which make up 5% of the index. Full inclusion would make up 40% of the index. China A-shares provide an alternative investment for those interested in trading in Chinese equities.

Hong Kong Stock Exchange

What is the Hong Kong Stock Exchange (HKG).HK?

The Hong Kong Stock Exchange (HKG).HK is a member of HKEX Group – the leading venue for capital raising activity for Hong Kong and Mainland Chinese issuers. Among the world’s largest securities markets by market capitalisation, the Hong Kong Stock Exchange

originated with the founding of China’s first formal securities market, the

Association of Stockbrokers in Hong Kong( 1891). A second market opened in

1921, and in 1947 the two merged to form the Hong Kong Stock Exchange. The

exchange introduced automated ordering in 1993 and stock option trading in

1995. It merged with the Hong Kong Futures Exchange and the Hong Kong

Securities Clearing Company in 2000, thus forming Hong Kong Exchanges and

Clearing Ltd.

 Breaking down the Hong Kong Stock Exchange (HKG).HK

The Hong Kong Stock Exchange(HKG).HK is among the largest markets in Asia with over 2,500 listed companies. As of November 2020, The aggregate market capitalisation of

companies listed on the exchange was around HK$45.5 trillion. The growth has

been fueled by listings by Mainland Chinese companies (H-Shares on the Hong

Kong Stock Exchange), their rapid development going hand-in-hand with the

aspiration to make China the world’s largest economy. The minimum market

capitalisation for a listing is currently HK$500 million, a minimum value of

public float being HK$125 million. The exchange raised these minimum amounts in

2017 to strengthen trading liquidity for market participants, thereby enhancing

the quality of the exchange’s listed issuers

Quite a few of the top listed companies by market capitalisation are banks and insurance companies from Mainland China, such as the Industrial and Commercial Bank of China, China Construction Bank, Bank of China, and Ping An Insurance. Nevertheless, as of

Nov. 2020, Tencent Holdings, the Chinese internet conglomerate, stands far

above the crowd at the No. 1 position.

Conclusion

Investing in China is a growing obsession with investors not only globally but locally in China as well. China has passed the threshold into advanced economic space. This is definitively borne out by the performance of Chinese equities and the Hong Kong Stock Market. There

are plenty of safeguards in place for regulated trading for both Chinese and

international investors.

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