H-Shares: What It Means, Regulation

What Are H-Shares?

H-shares are shares of Chinese mainland companies that are listed on the Hong Kong Stock Exchange or other foreign exchanges. Although H-shares are regulated by Chinese law, they are denominated in Hong Kong dollars and are traded in the same way as other equities on the Hong Kong exchange.

H-shares are available for more than 300 Chinese companies as of Dec. 31, 2023, giving investors access to most of the major economic sectors, such as financials, industrials, and utilities.

Understanding H-Shares

H-shares first became available for trading in 1993. They were initiated as a way for foreigners to invest in mainland Chinese companies. Before the issue of H-shares, companies listed what are known as A-shares, which were only available to mainland Chinese investors.

In 2006, China listed A-shares and H-shares simultaneously for the first time. Because foreign investors may trade H-shares, the shares are more liquid than A-shares. As a result, A-shares typically trade at a premium to H-shares of the same company. Foreigners can also now trade A-shares, but the process is more complicated.

H-Shares vs. A-Shares

A-shares are offered by public Chinese companies trading on the Shenzhen and Shanghai Stock Exchanges or other Chinese stock exchanges. A-shares are typically quoted in Chinese renminbi and traded by mainland Chinese citizens.

Foreign investment in these businesses is regulated through the Qualified Foreign Institutional Investor system. In contrast, public Chinese companies offering H-shares are listed on the Hong Kong Stock Exchange. In addition, H-shares are quoted in Hong Kong dollars and freely traded by all types of investors.

Regulation of H-Shares

Companies offering H-shares must follow the regulations described in the Stock Exchange of Hong Kong’s (SEHK) Listing Rules for the Main Board and for the Growth Enterprise Market (GEM). The rules state that annual accounts must follow Hong Kong or international accounting standards.

A company’s articles of incorporation must include sections clarifying the varying nature of domestic shares and foreign shares including H-shares. The articles must also state the rights given to each purchaser.

The sections protecting investors must follow the laws of Hong Kong and be included in the company’s constitutional documents. Otherwise, the processes of listing and trading H-shares are similar to those of other stocks in Hong Kong.

Stock Connect Between Shanghai and Hong Kong Stock Exchanges

In 2014, the Shanghai-Hong Kong Stock Connect linked the stock exchanges of Shanghai and Hong Kong. Rules limiting which types of investors may purchase A-shares and H-shares were modified to diversify the assets of Chinese investors, increase efficiencies for trading in Chinese stocks, and include Chinese companies in global benchmark stock indices.

Because the stock market in China was unified, it became one of the largest stock exchanges worldwide according to market cap and daily trading turnover.

The Bottom Line

China is a heavily regulated country by the state party and this includes the entire financial sector. For a long time, the country was closed to foreign investors, but in the 1990s, H-shares were made available so that foreigners could invest in mainland Chinese companies.

Investors looking to gain access to Chinese companies can invest in H-shares or also go a much simpler route and invest in ETFs or mutual funds that track Chinese stock exchange indexes.