Overview of the Chinese Stock Market

A lot of people want to invest in China because China has the 2nd largest economy in the world as measured by total gross domestic product and China's economy at times grows at a fast pace, especially when the Chinese government stimulates the economy with massive infrastructure spending. Unfortunately, the Chinese stock market is complex, and sometimes difficult to understand. This page will attempt to clarify how the Chinese stock market works.

China's Internal Markets

China has 3 major stock markets:

The Shanghai and Shenzhen stock exchanges represent China's "internal" stock markets. Historically, the Chinese government has wanted to isolate these markets from foreign investors, although the restrictions have been softened in recent years.

Mechanically, the way the government restricts outsiders from directly buying shares in these internal markets is by requiring Chinese companies to create special classes of common stock - some that can be owned by foreigners and some that can only be owned by Chinese. It's a concept unique to China.

Common stock shares known as "A shares" are traded in the Shanghai and Shenzhen markets and historically were only available to local Chinese investors. A shares are traded in the Chinese currency (the Renminbi).

Companies in these markets can also issue "B shares". B shares are common stock shares that are open to both Chinese mainland and foreign investors, and actually trade in a foreign currency. B shares trade in the US dollar in Shanghai and in the Hong Kong dollar in Shenzhen. Chinese citizens can buy B shares but obviously must have a foreign currency account to do so.

The B shares were supposed to be the way that foreigners would invest in Chinese companies, but the concept never really took off. Starting in the early 2000's, the Chinese government started to allow some foreign investors to buy A shares. Foreign institutional investors can buy A shares if they can qualify under one of two programs created by the Chinese government. But there are limits to these programs in terms of who can get a special license and how much they can trade on the exchanges.

But the primary way that foreigners can now buy A shares is using the "stock connect" program that exists between the Hong Kong, Shanghai and Shenzhen stock exchanges. The stock connect program started in 2014 and allows international and mainland Chinese investors to trade securities in each other's markets through the trading and clearing facilities of their home exchange. But not all A shares are included in the stock connect program, so access to A shares is still not totally open.

Here are the securities we have in our database from the internal markets:

ExchangeSecurity Class# of Securities
Shanghai Stock ExchangeA1,168
Shanghai Stock ExchangeB46
Shenzhen Stock ExchangeA1,735
Shenzhen Stock ExchangeB42

The Shanghai Composite Index is the most common index that outsiders use to track the Shanghai stock market. Shenzhen is the smallest of China's 3 markets, so most outsiders tend to just look at the Shanghai Composite Index to measure how well the "internal" stock markets are doing.

Keep in mind that many of the Chinese companies traded on the internal stock markets are unique, in that they are government owned, with a minority portion of their stock traded on a public stock market. This is a result of China's economic policies that are unique in the world - a blended mix of limited economic freedoms within a communist country.

Hong Kong Market

Until the year 1997, Hong Kong was a British colony with a thriving local, private economy. When communist China took ownership in 1997, Hong Kong became one of the most unique places in the world, as China has allowed Hong Kong to continue most of it's previous economic policies, yet it is owned by a communist government. The Hong Kong stock market, which existed before 1997, reflects this unique history and status in the world.

The Hong Kong stock market is unique because it is made up of a combination of:

Many Chinese mainland companies with A shares also list their H shares in the Hong Kong stock market. This is primarily due to the desire to allow greater access to foreign investors, as there are no restrictions as to who can buy H shares on the Hong Kong market. Note that a Chinese company cannot issue both B and H shares. B shares were supposed to be the primary way for Chinese companies to reach out to foreign investors, but it never really turned out that way. H shares have become way more popular than B shares, which in a way undermined the whole point of the B share program. It is unclear what will happen to B shares going forward. A Chinese company can convert their B shares to H shares, but apparently it is not easy.

The Chinese companies that are only listed in Hong Kong consist of two types:

Red chips are a little difficult to understand, because it is unclear why a Chinese government owned company would go to the trouble of incorporating outside of China and having its primary stock trade only in Hong Kong. We guess it just illustrates the complex nature of China's economy and political system. The P chips make more sense to us, as they are privately owned Chinese companies that wanted to be free of the restrictions associated with China's internal stock markets.

Here are the Chinese securities we have in our database that trade in Hong Kong:

ExchangeSecurity Class# of Securities
Hong Kong ExchangeP Chips429
Hong Kong ExchangeH shares241
Hong Kong ExchangeRed Chips158

Hong Kong as a country

Despite its official status as a province or region owned by China, Hong Kong is still considered to be a "country" by most index providers. So companies that are incorporated in Hong Kong or have their primary security listed in Hong Kong are classified as being from the country of Hong Kong, not China. Hong Kong, the "country", is considered by most index providers to be a "developed market", whereas China is considered to be an emerging market. We have 935 securities in our database that trade in Hong Kong that are not considered to be Chinese companies (i.e. they are companies in Hong Kong).

EWH, the iShares MSCI Hong Kong ETF, tracks an index of Hong Kong stocks only. Here is a comparison of EWH's performance to that of the Shanghai Composite Index:

One of the most common indexes used to track the Hong Kong stock market is the Hang Seng Index. The Hang Seng Index, which includes the largest and most liquid stocks on the Main Board of the Stock Exchange of Hong Kong, includes both Hong Kong and Chinese companies.

Chinese ADRs Listed on U.S. Stock Exchanges

There are currently 145 Chinese companies that have shares traded on U.S. stock exchanges through American Depository Receipts or ADRs. An ADR is one way for a non-U.S. company to trade shares on the U.S. stock market. You can look at them by visiting our list of ADRs. In terms of the number of securities, China accounts for the largest number of ADRs of any country in the world.

An ADR is evidence of ownership of the common stock of a foreign company. The common stock can be either privately held or publicly traded somewhere in the world. Although a Chinese company that has an H share traded in Hong Kong can also have an ADR traded in the U.S, many times the ADR traded in the U.S. is the company's only publicly traded security.

Chinese Companies Directly Listed on U.S. Stock Exchanges

To confuse matters more, there are 68 Chinese companies that directly trade on a U.S. stock exchange, without using an ADR. These are similar in nature to P chips, in that they are privately owned companies that are judged to be a "Chinese" company, but they have chosen to have their primary stock trade on a U.S. stock exchange (rather than in Hong Kong). What makes a company traded on a U.S. stock exchange a "Chinese company"? Some index providers will include in their "Chinese index" any company that is traded on a U.S. stock exchange, derives over 50 per cent of the revenue or assets of the company from China, and is controlled by a mainland Chinese entity, company or individual. These companies are sometimes referred to as "N shares".

See also our list of Chinese companies that trade on U.S. stock exchanges.

Notable ETFs

In summary, there are basically three "buckets" of Chinese companies: Chinese companies traded on U.S. stock exchanges (mostly ADRs), Chinese companies traded in Hong Kong, and Chinese A and B shares traded in Shanghai and Shenzhen (with the B shares not being that important). There are U.S. ETFs that track indexes that are tracking each of these buckets:

Let's compare the performance of these buckets to each other, as well as to EWH, which tracks Hong Kong companies:

There are starting to be a few U.S. ETFs that track an index made up of all Chinese securities (from all three buckets), but they are relatively new ETFs because the restrictions on owning A shares were just recently lifted. So this list should grow dramatically over the next few years:

SymbolDescriptionInception DateActions
CXSEWisdomTree China ex-State-Owned Enterprises ETF09/19/2012Analyze
CNDeutsche X-Trackers All China Equity ETF04/29/2014Analyze
KALLKraneShares MSCI All China Index ETF02/12/2015Analyze
KUREKraneShares MSCI All China Health Care Index ETF02/02/2018Analyze
CHIHGlobal X MSCI China Health Care ETF12/11/2018Analyze
CHIKGlobal X MSCI China Information Technology ETF12/11/2018Analyze
CHILGlobal X MSCI China Large-Cap 50 ETF12/11/2018Analyze
CHIRGlobal X MSCI China Real Estate ETF12/11/2018Analyze
CHISGlobal X MSCI China Consumer Staples ETF12/11/2018Analyze
CHIUGlobal X MSCI China Utilities ETF12/11/2018Analyze

All data is a live query from our database. The wording was last updated: 02/21/2019.

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