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The ABCs of China's Share Markets

October 18, 2012

As I’ve stated before, I believe China can maintain strong long-term economic growth (even if at lower levels than the double-digit growth rates of years past) and believe there are reasons to be optimistic as an investor in its various markets. China may be growing at a somewhat slower pace, but it is slowly becoming less dependent on exports, and it is investing for its future growth. Investors should be happy to see that happen.
-Mark Mobius, executive chairman, Templeton Emerging Markets Group

A shares, B shares, H shares. Chinese equity listings can be confusing to global investors. I’m often asked what I think about a particular share market in China, why one is outperforming others, and which to invest in. I can’t tell you what to invest in, but I can give you some information which I hope will help you discern what choices make sense for you.

The ABCs…

Listed companies in China fall under three primary categories: “A” shares, “B” shares and “H” shares.

A shares are those of local Chinese companies denominated in Renminbi, traded primarily between local investors on the Shanghai or Shenzhen stock exchanges. Qualified Foreign Institutional Investors (QFII) who have been granted special permission by the Chinese government can also participate in this market.

B shares represent Chinese companies with a face value in Renminbi, but listed for trading to primarily international investors in U.S. Dollars as in the Shanghai exchange, or Hong Kong Dollars as in the Shenzhen exchange. Mainland Chinese investors may also trade B shares with legal foreign currency accounts.

H shares represent Chinese companies regulated by Chinese law, but are freely tradeable by anyone. H shares are listed in Hong Kong and are quoted in Hong Kong Dollars—hence the “H.”

Some investors also refer to companies that may not be incorporated in China but have their primary business there as L shares (trading the London Stock Exchange) and N shares, which trade in the U.S. on the New York Stock Exchange, NASDAQ, or the American Stock Exchange.

The “red chips” represent companies incorporated in Hong Kong, but whose primary business interests are in mainland China.

Other investment choices include dim sum bonds (bonds denominated in Renminbi being issued in Hong Kong), RQFII (a new scheme where Chinese managers invest into mainland securities with Renminbi raised in Hong Kong), and RMB bond products, just to name a few.

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