What Are China A-Shares?
A-shares refer to stock shares of mainland China-based companies available for trading on the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). These shares were initially restricted to mainland citizens due to China's foreign investment restrictions. It's important to note that A-shares are quoted only in RMB, whereas B-shares are quoted in foreign currencies like the US dollar and are more accessible to foreign investors.
Basics
China's stock market consists of the Shanghai and Shenzhen Stock Exchanges, which trade China A-shares. These A-shares were historically accessible exclusively to Chinese citizens due to strict foreign investment restrictions imposed by China.
Since 2003, a transformation has taken place. Qualified Foreign Institutional Investors (QFIIs) have been granted the privilege to invest in these shares, marking a pivotal shift. The QFII system, initiated in 2002, enables authorized international investors to trade within mainland China's stock exchanges. A-shares, also called domestic shares, employ the Chinese renminbi (RMB) as their primary currency for valuation.
China A-Shares vs. B-Shares
China's A-Shares and B-Shares exhibit distinct characteristics. A-Shares are exclusively denominated in RMB, while B-Shares are quoted in foreign currencies like the US dollar, making them more accessible to foreign investors. However, obstacles exist for foreign investors looking to access A-shares due to Chinese government regulations, while Chinese investors encounter challenges accessing B-shares, primarily due to currency exchange restrictions. Some companies choose to dual-list their stocks on both A-Shares and B-Shares markets.
This restricted access for Chinese investors to B-Shares often results in significantly higher valuations for the same company's stock on the A-Shares market compared to the B-Shares market. While foreign investors can now invest in A-Shares, there is a monthly 20% repatriation limit for funds sent back to foreign countries.
The Shanghai Stock Exchange (SSE) manages the SSE 180 Index, a pivotal performance indicator for A-Shares. The index comprises 180 stocks chosen from the SSE, ensuring diversity in sector, size, and liquidity to comprehensively reflect the Shanghai securities market's overall performance and operation.
Evolution of China A-Shares
Since its inception in 1990, with a significant reform in 2002, the China A-Shares index has experienced notable fluctuations while maintaining pace with the country's economic growth. Notably, the period between 2015 and 2016 posed significant challenges, witnessing a 52-week performance decline of -21.55% as of July 20, 2016.
As China becomes a more developed economy, there is a high demand for Chinese stocks. Regulatory authorities overseeing stock exchanges continue their endeavors to enhance the accessibility of A-shares to foreign investors, aiming for global recognition in the investment community.
In June 2017, the MSCI Emerging Markets Index unveiled a phased approach, gradually introducing 222 China A large-cap stocks. Starting in May 2018, the index began incorporating China's large-cap A-shares, constituting 5% of the index. Full inclusion would account for 40% of the index.
For nations like China, embracing openness to global investors becomes imperative for sustaining competitiveness and fostering economic prosperity. China A-Shares are an appealing investment avenue for those seeking involvement in Chinese securities trading.
Conclusion
A-shares, denominated in RMB, were once restricted to Chinese citizens but are now gradually opening to foreign investors through the QFII system. B-shares, quoted in other currencies, are more accessible to foreigners. Higher valuations on A-shares reflect limited Chinese investor access to B-shares. The SSE 180 Index mirrors the Shanghai securities market's performance. China's economic growth prompts regulatory efforts to attract foreign investment, as seen with the inclusion of China A large-cap stocks in the MSCI Emerging Markets Index. China A-Shares offer an appealing option for those interested in Chinese securities trading.