A-shares are renminbi-denominated shares of Chinese companies listed on the Shanghai or Shenzhen stock exchanges. Previously only available to domestic investors, foreign institutions can acquire A-shares using their Qualified Foreign Institutional Investor (QFII) or Renminbi Qualified Foreign Institutional Investor (RQFII) quotas. Foreign investors can buy A-shares listed in Shanghai through the Shanghai Hong Kong Stock Connect platform.
B-shares are issued by Chinese companies listed either in Shanghai or Shenzhen and are reserved for foreign investors. B-shares’ value is quoted in renminbi, but trade is conducted in foreign currency. B-shares have been traded since 1991 but they have not gained traction with investors, and account for a very small amount of the equity securities listed onshore. As a result, they have been widely criticised for a lack of liquidity and foreign investors usually prefer to trade in H-shares, listed in Hong Kong.
H-shares are shares of mainland Chinese companies traded on the Hong Kong Stock Exchange and denominated in Hong Kong dollars. For many of the companies with an H-share listing, it is secondary to one in Shanghai. H-shares were launched in 1993 as a way to open China’s mainland economy to foreign investors. The Chinese authorities believed that if mainland companies could reach the Hong Kong exchange’s strict listing requirements around governance and business practices, including audit and accounting, investor protection and recourse to arbitration, then foreign investors would be prepared to invest. H-shares are seen as more liquid and less volatile than Chinese-listed A-shares and B-shares.
Over the past decade Beijing has permitted a limited use of the renminbi in international markets as part of its policy to increase the use of its currency on the world stage (often referred to as currency internationalisation). In November 2003 the State Council, China’s executive, approved the first renminbi trading centre outside of China (or offshore) in Hong Kong. Renminbi traded outside China is referred to as CNH, and instead of having a fixed rate against the US dollar, the exchange rate is driven by demand and supply. As a result, there is often a discrepancy between onshore and offshore exchange rates.
In 2007, the first so-called dim-sum bonds – renminbi-denominated bonds issued to foreign investors from Hong Kong – were issued by China Development Bank. Since then, China has sanctioned seven additional renminbi clearing centres: Macau, Taipei, Singapore, London, Frankfurt, Seoul, and Toronto. Dim-sum bonds have been a popular way for investors to gain access to Chinese debt and the market is now worth RMB258 billion.
In addition to bonds and currency, Chinese companies are also listed offshore. The biggest and best-known offshore stock market is Hong Kong, where nearly 200 Chinese companies have listed H-shares denominated in Hong Kong dollars. But Chinese companies are listed all around the world, roughly 70 Chinese companies are listed in New York, for example. All these share lines comprise China’s offshore equity market.
China’s onshore market includes securities and currency trades undertaken in China – usually in Shanghai and Shenzhen, the country’s two major financial centres. Foreign investors can only buy financial securities in these markets using Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) quotas. Non-Chinese investors can now also buy A-shares on the Shanghai Stock Exchange through Shanghai-Hong Kong Stock Connect platform.
Onshore trades are conducted in Chinese renminbi – the unit of account is called the yuan. When the renminbi is traded in mainland China (with the symbol CNY) the People’s Bank of China (PBoC), the central bank, sets a daily rate for the yuan against the US dollar, which is called the parity rate. Since 2005, PBoC has allowed the renminbi to trade in a narrow band either side of the parity rate, initially set at 0.3% and increased to 1% in April 2012. In March 2014 PBoC doubled this band as part of Beijing’s aim to further liberalise the exchange rate regime.
In August 2015, PBoC changed its methodology for calculating the parity rate, giving more weight to the previous day’s close. As the close had generally been around 1.5% lower than the parity rate, the alteration to the parity-rate calculation saw the yuan devalue steeply against the dollar. Part of the PBoC’s rationale was to make the fixing mechanism more market-based, elevate the renminbi’s status in the international monetary system and ultimately work towards it becoming a reserve currency.
Under the Qualified Foreign Institutional Investor (QFII) scheme, non-Chinese institutions from countries that have signed a memorandum of understanding with the China Securities Regulatory Commission (CSRC) are eligible to apply for a quota to invest in mainland Chinese securities.
Investors have to meet specific criteria, including minimum asset and staff sizes as well as governance and accounting standards, to be granted a US-dollar-denominated quota for purchasing onshore securities, which is then converted into renminbi for settlement. Since 2012, institutions with QFII licences can invest in shares, stock-index futures, fixed-income products traded in the inter-bank bond market and private placement bonds from small- and medium-sized enterprises.
The Renminbi Qualified Foreign Institutional Investor (RQFII) scheme allows foreign investors to use offshore renminbi to buy mainland securities. RQFII is open to any financial institutions that are registered in Hong Kong, London and Singapore, as these jurisdictions have fully implemented the RQFII scheme locally. Subsidiaries of Chinese fund management companies registered in those cities are also eligible.
Shanghai-Hong Kong Stock Connect is a securities trading and clearing link platform that allows investors to trade shares on both stock markets using local brokers and clearing houses. Chinese Premier Li Keqiang announced the programme on 10 April 2014, and it launched on 17 November 2014.