China’s Equity Market
China’s equity market is relatively young. The Shanghai and Shenzhen Stock Exchanges opened in December 1990 during Chairman Deng Xiaoping’s famed ‘Reform and Opening Up’ initiatives. The markets were tiny, listing only eight names with a market cap of USD 500 million. Growth has been swift in the interim, however. As of February 2017, 3137 companies can be found on the exchanges, with a market cap more than RMB 50 trillion.1
In addition to listing on Mainland markets, the largest Chinese firms and State Owned Enterprises (SOEs) also list on the Hong Kong Stock Exchange. Although the Hong Kong Exchange is governed differently than the Shanghai and Shenzhen exchanges, the three are often grouped together in the “Greater China” category. Today, the total market capitalization of Greater China’s equity market exceeds USD 10.8 trillion, the second largest market after the United States.2
Equity Market Structure and Regulation
Although China’s markets are often compared to their Western counterparts by market capitalization or trading volume, those comparisons fail to reveal how different China’s markets are. The country’s exchanges are more heavily regulated and are subject to intervention by regulatory and government officials.
The China Securities Regulatory Commission (CSRC) is the primary body responsible for managing the Shanghai and Shenzhen exchanges.
The Commission’s responsibilities include:
- To provide premises and facilities for securities trading;
- To develop the business rules of the exchanges;
- To accept listing applications and arrange for the listing of securities;
- To organize and supervise securities trading;
- To regulate exchange members and listed companies;
- To manage and disclose market information.
A summary of the CSRC’s regulatory structure, as well as China’s wider regulatory structure, can be found in the attached chart.
Differences Between Shanghai and Shenzhen Stock Exchanges
Although Mainland China’s two exchanges were developed around the same time, they serve very different functions. The stately Shanghai exchange has historically listed China’s most prominent large cap companies— State Owned Enterprises (SOEs), banks and energy firms— sectors collectively known as “Old China.” Shenzhen, however, plays host to small and mid cap private sectors names. Moreover, the ChiNext Market of fast-growing technology firms is also based in Shenzhen.3
Shanghai Stock Exchange
The Shanghai Stock Exchange (SSE) originated in the late 1800s as a hub for merchants to purchase interests in startup ventures in the newly-opening China. Trading at the thriving reform was halted during Mao Zedong’s tenure, and subsequently restarted under Deng Xiaoping’s Reform and Opening Up. After commencing operations on December 19, 1990, the exchange quickly overtook its rival in Shenzhen to become China’s dominant exchange by market capitalization, trading volume, and securities turnover. The dominance continues today, with the SSE listing 1224 companies with a market cap of RMB 30.37 trillion, as of February 2017.4
The Shanghai Exchange hosts a number of financial instruments, included among them A-Shares, B-Shares, open and closed ended funds, warrants,5 T-bond repos,6 and convertible bonds.7 The primary benchmark used to gauge Exchange performance is the SSE Composite Index.8
Shenzhen Stock Exchange
The Shenzhen Stock Exchange (SZSE) was also launched in December 1990, but imbued with a more specific mandate. It was structured to promote small and medium size enterprise development and encourage the national strategy of independent innovation. After years of development, the SZSE consists of three main exchanges to serve companies of different sizes and maturation— the Main Board, the Small and Medium Enterprise (SME) Board and the ChiNext Market. The SZSE’s market capitalization is RMB 23.45 trillion as of February 2017.9
Products traded on the SSE include equities, bonds, and mutual funds. Within these categories, many sub-product lines are present including A-Shares, B-Shares, indices, open and closed-ended funds, fixed income products such as asset backed securities, and derivatives such as warrants and repurchase agreements. In contrast to SSE, several benchmarks are used to gauge Shenzhen’s performance such as the SZSE Component Index, SZSE 100 Index,10 SME Index,11 and ChiNext Index.12
An additional level of complexity is inherent in China’s market structure— the presence of multiple share classes. Historically, regulators have restricted foreigners’ access to Mainland markets, depriving investors of the significant growth opportunities associated with China’s emergence onto the global stage.
The gradual loosening of these controls has resulted in the presence of multiple share classes. These classes afford different privileges depending on where the investor purchases the stock, where the listed company is incorporated, and the currency in which the stock is denominated. The below chart offers a general overview of these differences.
|A-Shares||RMB||Companies incorporated in the China
Traded in Shanghai and Shenzhen
Largest class of Chinese shares
Investors are Chinese nationals and foreign institutional investors eligible under the QFII, RQFII, and Stock Connect schemes
|B-Shares||USD/HKD||Companies incorporated in China
Traded in Shanghai in US dollars and Shenzhen in Hong Kong dollars
Before expansion of A-Share market, B-Shares were very popular with foreign investors. Now, less-utilized.
|H-Shares||HKD||Companies incorporated in China, traded in Hong Kong|
|N-Shares||USD||Companies incorporated in China
Listed and traded on the New York Stock Exchange
|L-Shares||GBP||Companies incorporated in China
Listed and traded on the London Stock Exchange
|Red Chips||HKD||Chinese companies incorporated outside China
Listed in Hong Kong
Often state-owned or state-controlled companies
|P-Chips||HKD||Chinese companies incorporated outside of China
Listed in Hong Kong
|S-Shares||SGD||Companies incorporated in China
Traded in Singapore
CSOP is most concerned with A-Shares because it is the class most representative of Mainland China’s economy. For example, many Chinese companies in sectors such as military, healthcare, traditional medicine, Chinese spirits, and certain consumer goods are only listed in Shanghai and Shenzhen, not international exchanges. As such consumption-related sectors play an increasingly important role in the China growth story, foreign investors cannot gain proper exposure to China without accessing these sectors and companies— access which can only be found on Mainland exchanges.
After 20 years of development, the China A-Share market has grown significantly. As of September 2016, there were more than 2953 China A-Share companies listed on the SSE and SZSE. Participants in the China A-Share market include retail investors, institutional investors, and listed companies.
A Note on A-Shares vs. H-Shares
Despite the superior access granted by A-Shares, H-Shares (Mainland Chinese companies listed in Hong Kong) remain popular with global investors. Although the H-Share universe is limited–comprised of 212 companies–investors flock to them because Hong Kong’s legal and market frameworks are more familiar to the Western mindset.
The below chart summarizes some of the major differences among the two classes:
Trade on the Shanghai & Shenzhen stock exchanges
Trade on Hong Kong stock exchange
|Open only to mainland citizens and the Qualified Institutional Investors ("QFIIs") / Renminbi Qualified Institutional Investors ("RQFIIs") systems||Open to international investors|
|Quoted in Renminbi||Quoted in Hong Kong dollar|
|All Chinese sectors and companies available for investment||Limited number of Chinese sectors and companies available for investment|
|MSCI and FTSE considering adding to their most tracked global benchmarks||Currently a component of MSCI’s and FTSE’s most tracked global benchmarks|
1. Source: Shanghai Stock Exchange and Shenzhen Stock Exchange websites, March 2017.
2. Source: Securities and Futures Commission (SFC) Hong Kong
3. ChiNext Market: The ChiNext Market is a fully-independent offshoot of Shenzhen’s Main Board that supports the growth of small and medium sized entities. It was launched in 2009 to promote the development of high-tech and entrepreneurial firms.
4. Source: SSE Monthly Market Statistics (2017-02), Shanghai Stock Exchange (SSE)
5. Warrant: A warrant is a derivative that confers the right, but not the obligation, to buy or sell a security, normally an equity, at a certain price before expiration.
6. T-bond Repos: A T-bond repurchase agreement (repo) is a form of short-term borrowing for dealers in Treasury Bonds.
7. Convertible bonds: A convertible bond is a type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value.
8. The SSE Composite Index is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange.
9. Source: Shenzhen Stock Exchange Market Overview (2017-02)
10. SZSE 100 Index: SZSE 100 Index is a free-float capitalization-weighted equity index and comprises the 100 largest and most liquid A-share stocks listed and trading on the Shenzhen Stock Exchange.
11. SME Index: The Small and Medium Enterprise (SME) Index is a free-float, capitalization-weighted equity index and comprises the 100 largest and most liquid A-Share stocks listed and trading on the SME Board.
12. ChiNext Index: The ChiNext Index is free-float, capitalization-weighted index that comprises the 100 largest and most liquid A-share stocks listed and trading on the ChiNext Market of the Shenzhen Stock Exchange.