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What you need to know about investing in the Chinese stock market?

We look at the world’s second largest economy and uncover the mysteries in the Chinese stock market.
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Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

With multiple stock exchanges, ever-evolving regulations, and various share classifications, China can seem like a daunting place to invest. It can even be difficult to know where to start. For starters, in Chinese stock exchanges, red symbolises a gain whilst green symbolises a loss.

This begs the question, what else do you need to know?

The world’s second largest economy is home to over 1.4 billion people. It has a rapidly expanding middle class and is pushing towards urbanisation, which means the investment opportunities could be too big to ignore – is it time to invest in China?

In this article, we look at the two main stock exchanges and the different types of share classification. This article is not personal advice. If you’re not sure what’s right for you, please ask about financial advice. Investments will rise and fall in value, so you could get back less than you invest.

Shanghai Stock Exchange (SSE)

The Shanghai Stock Exchange (SSE) was established during the Qing Dynasty in the 1890’s and soon became the financial hub of the far east. But, following the communist revolution and the foundation of the People’s Republic of China, it shut its doors in 1949.

After laying dormant for decades, economic reforms and an appetite to re-emerge to the outside world led to the exchange unlocking its doors in 1990. Today, the SSE is the biggest stock market in Asia and the third largest globally. Many of the bigger, current and former state-owned companies are listed here.

In 2019, the Science and Technology Innovation Board (SSE STAR Market) was launched. This is often seen as a Chinese equivalent of the US Nasdaq stock market. With more lenient listing criteria than other local exchanges, the STAR Market is a magnet for startups and tech enterprises with the aim of boosting China's technological progress.

The below chart highlights the different listings on the SSE. We will go into more detail on the differences between A Shares and B Shares later.

Number of Listings on Shangai Stock Exchange

Past performance isn’t a guide to future returns.
Source: SSE, as at 15/08/2023

Shenzhen Stock Exchange (SZSE)

The Shenzhen Stock Exchange (SZSE) was established in 1990 to help drive growth and innovation by allowing smaller companies to get support from public markets. It’s home to around 3,000 listed companies. As highlighted in the table below, the majority of these are manufacturing companies.

Number of companies on Shenzhen Stock Exchange

Past performance isn’t a guide to future returns.

Share Classifications

There are several different types of Chinese shares, each with their own nuances, accessibility, and currencies. A, B, and H shares are just a few of the main classes.

A Shares

China A shares are those of mainland Chinese companies denominated in Renminbi (the Chinese currency) and trade on both the Shanghai and Shenzhen stock exchanges. China A shares offer the widest selection of opportunities.

Historically, China A shares were only available to domestic investors with overseas investors shut out. But, after joining the World Trade Organisation (WTO) in 2001, a Qualified Foreign Institutional Investor (QFII) program was established which gave selected institutions access.

In 2011, more advances were made with the RMB Qualified Foreign Institutional Investor (RQFII) programme. These were both combined in 2020 to form the Qualified Foreign Investor (QFI) regime. In short, China was making it easier for international investors to buy domestic shares.

B Shares

B Shares were originally designed for overseas investors to access mainland Chinese companies. But, since the A share rules have been relaxed, the difference between the two is less clear.

The key point of difference though is the currency they trade in. B Shares are traded in US dollars on the Shanghai Stock Exchange (SSE), in contrast they trade in Hong Kong dollars on the Shenzhen Stock Exchange (SZSE).

H Shares

H Shares are those issued by companies from mainland China but trade on the Hong Kong Stock Exchange, in Hong Kong dollars. This means anyone – not only QFI – can buy these shares.

There are several other share types like Red Chip, P Chip, S Chip and N Share but A, B and H are the key ones to be aware of.

Food for thought

The Chinese stock market has experienced its share of ups and downs, along with several regulatory changes. With so many companies to choose from, investors have a treasure trove of opportunities to pick from. But if you're thinking about investing in the region, it’s important to keep in mind the potential risks and government interventions and regularly review your investments to remain on track and ensure they are right for you. Emerging markets are generally less well-regulated than the UK and it can sometimes be difficult to buy and sell investments in these areas. Political and economic instability are more likely, making them higher risk than those investing in more regulated and developed markets.

For those without the time or knowledge to navigate the complexities of investing in Chinese companies for themselves, a fund might be an option. The Wealth Shortlist contains our favoured options for either investing in China directly or gaining exposure to it by investing in a broader Asian fund.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

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Written by
Henry Ince
Henry Ince
Investment Analyst

Henry is a member of our research team, having recently re-joined HL in 2023 after working in asset management for several years. His expertise is deployed writing insightful analysis across a range of sectors including the UK Smaller Companies, Global and Asia & emerging market fund sectors.

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Article history
Published: 23rd August 2023