H-Shares

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What Are H-shares?

H-Shares is a class of shares of a public company from Mainland China that trades on the Hong Kong Stock exchange in Hong Kong Dollar. Foreign Investors can buy such shares freely like other equities on Hong Kong Stock Exchange. It was a huge relief for International Investors.

They were prohibited from buying shares of public companies in China trading under the Shenzhen or Shanghai Stock exchanges unless they were Qualified Foreign Institutional Investors. . Since they are equally available to both national and international investors, they are bought and sold in the same manner as any other stocks in the exchange.

What Are H-shares?

H-Shares Explained

The Stock Market in Mainland China is very restrictive and is only open to Chinese people but with lots of restrictions. Not everyone can invest in Chinese equities like in other developed countries. So to ease this situation, the Chinese government came up with this concept.

Hong Kong is the Special Administrative Region of the People’s Republic of China. Hong Kong was returned by Britain to China in 1997 when the 99-year lease ended. So unlike China, which is very conservative, Hong Kong’s policies are more liberal, and English is also its official language. Though Hong Kong is part of China, it allowed Hong Kong to govern itself for another 50 years. So policies and stock exchanges are very liberal in Hong Kong.

Foreigners find it challenging to trade Chinese shares in exchanges like Shenzhen and Shanghai. So, the Chinese government came up with a new policy of allowing public companies of china to list their shares on the Hong Kong exchange also. These shares are listed in the H-shares index and are called H-shares and can be freely traded by international investors in Hong Kong Dollars (HKD).

These are extremely important for foreign investors. The conservative equity market in China was difficult for many investors to invest in. China is an emerging super economy. Many institutions want to invest in China to gain exposure to developing economies.

Examples

Let us understand the concept of h-shares index with the help of some suitable examples.

Example #1

First Tractor, trading under the local code (00038. HK), is H-share trading on the Hong Kong Stock exchange. The Average Trading price as of 3^rd January 2020 is 1.824HKD. So any foreign Investor can easily buy or sell the shares of First Tractor from the Hong Kong Stock Market.
First Tractor is a Chinese public company trading in Hong Kong under HKD. It gives free trading rights to the stock, which is not allowed in Chinese exchanges.
Investors value Chinese stocks as the most growth stocks. Earlier, when this stock was only traded in Chinese exchanges, foreigners were not allowed to trade in the stock. Now with the concept of H-shares, the First Tractor public ltd company can easily sell its shares to foreigners ready to invest in Chinese stocks.
Due to its huge emphasis on manufacturing, China has increased its economy by many folds. It has acted as an attractive investment for many institutional investors worldwide. These are bridging the gap now.

Example #2

NE Electric is trading under the local code (00042. HK) and is also an H-share, trading under the Hong Kong Stock exchange. The average trading price as of 3^rd January 2020 is 0.565HKD.

The above examples very clearly highlight the differences that a Chinese company stock faces while trading in the stock exchanges of China as well as HongKong. However, it also points out the small steps that China is slowly taking towards easing the trading restrictions within the country.

Index Of H-Shares

This Index is the Hang Seng China Enterprises Index. The code is HSCEI. It is a free-float market-cap weighted index. Earlier only H-shares were part of it. Later the Index included Red-Chips and Private Enterprises. The index's current price is at HKD 11,253 as of 3^rd January 2020. This stock index helps understand its movement in the Hong Kong Stock Exchange.

H-Shares Vs A-Shares

Both the above are two separate types of shares that are linked to Chinese companies. However, there are some important points of differences between the two. Let us study the same as given below:

H-shares are the Shares of Public Limited Companies in mainland China that are trading on the Hong Kong Stock exchange. China A-Shares are the shares of public limited companies of China trading in Chinese exchanges such as Shenzhen and Shanghai Stock Exchanges.
Both types of shares follow the rules of Chinese listing requirements. However, H-shares also abide by the listing requirements of the Hong Kong stock exchange.
The Chinese Equity market is very conservative. Several rules prevent foreign investors from directly investing in the Chinese Equity Market. For this reason, investment in A-Shares is very difficult for Foreign Investors. On the other hand, Investment in H-shares is comparatively very easy. Rules that govern the Hong-Kong stock exchange are very lenient compared to those that govern Chinese exchanges.
H-shares are far more liquid than A-Shares. It is because foreigners are allowed to trade in H-shares, which makes them more tradable than A-Shares.
The price of A-Share is higher as it illiquid compared to H-share, which is far more liquid.

Hong Kong has gained the status of the financial hub of the world. It has helped institutions to gain exposure to companies from different sectors of the Chinese economy. We will see what happens to the Hong Kong economy after 50 years when the "One Country two laws" will merge into "One country one law." Efforts should be made to liberalize the Chinese economy and merge it with the norms of the Hong Kong economy.