What Is A-Shares?
A-shares refer to the stock shares of companies based in mainland China that trade on China's two primary domestic stock exchanges: the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). These shares are denominated and traded in Chinese Yuan (CNY), the official currency of the People's Republic of China. A-shares are a significant component of the broader equity market, representing a unique category within the Chinese financial system due to their historical restrictions on foreign investment and their close ties to domestic economic policies.
History and Origin
The concept of A-shares emerged with the re-establishment of stock exchanges in mainland China in the early 1990s. While securities trading in Shanghai existed as early as the 1860s, formal stock exchanges were closed in 1949 with the Communist revolution62, 63. The modern Shanghai Stock Exchange was officially re-established on November 26, 1990, and commenced formal operations on December 19, 199058, 59, 60, 61. Shortly thereafter, the Shenzhen Stock Exchange officially began operations on July 3, 1991, though it was established on December 1, 199054, 55, 56, 57.
Initially, A-shares were primarily accessible only to mainland Chinese citizens, reflecting China's controlled approach to its capital markets52, 53. This historical restriction on foreign participation was part of a broader policy of capital controls aimed at managing the flow of foreign capital and maintaining financial stability51. Over time, however, China has gradually opened its A-share market to international investors through various programs, such as the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes, established in 2002 and later expanded48, 49, 50. A significant step towards greater accessibility was the introduction of the Stock Connect programs, starting with Shanghai-Hong Kong Stock Connect in November 2014 and Shenzhen-Hong Kong Stock Connect in December 201643, 44, 45, 46, 47. These programs have significantly increased foreign investor access to A-shares by allowing cross-boundary trading between the mainland and Hong Kong stock exchanges41, 42.
Key Takeaways
- A-shares are equity shares of mainland Chinese companies listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange.
- They are denominated and traded in Chinese Yuan (CNY).
- Historically, A-shares were restricted to domestic investors, but access has expanded through programs like QFII, RQFII, and Stock Connect.
- The A-share market is a key component of China's domestic capital markets.
Interpreting the A-Shares
Interpreting A-shares involves understanding their unique characteristics within the global investment landscape, particularly concerning market access, currency, and regulatory environment. While A-shares provide direct exposure to China's domestic economy, their pricing and volatility can be significantly influenced by local factors, including government policies and the prevalence of retail investors. Foreign investors, despite increased access, still navigate a market with distinct trading rules and settlement procedures compared to more globally integrated markets.
The inclusion of A-shares in major global indexes, such as the MSCI Emerging Markets Index, has enhanced their international visibility and integration into global portfolios39, 40. However, the level of foreign ownership in the A-share market remains relatively low, estimated at around 7.3% of the total A-share free float market capitalization as of September 201937, 38. This suggests that domestic sentiment often plays a more dominant role in A-share price movements compared to international investor sentiment35, 36.
Hypothetical Example
Consider "Phoenix Tech Co. Ltd.," a hypothetical technology company based in Shenzhen, China. Phoenix Tech successfully lists its shares on the Shenzhen Stock Exchange, making them A-shares. A domestic Chinese investor can purchase these A-shares directly through a local brokerage account, paying in Chinese Yuan.
An institutional investor based in London, interested in gaining exposure to China's technology sector, might consider investing in Phoenix Tech. Before the Stock Connect program, their access would have been limited to obtaining a QFII quota. However, with the Shenzhen-Hong Kong Stock Connect in place, the London-based investor can now purchase Phoenix Tech A-shares through a Hong Kong-based broker, facilitating the trade via the "Northbound" link of the Stock Connect program. The trade would still be settled in Chinese Yuan, but the process is streamlined for foreign participants. This example illustrates how the accessibility of A-shares has evolved, enabling broader participation in the Chinese domestic equity market.
Practical Applications
A-shares offer investors a direct avenue to participate in the growth of mainland Chinese companies. For portfolio managers, A-shares provide a means of diversification within an investment portfolio, particularly for those seeking exposure to the unique dynamics of China's domestic economy.
The increasing accessibility of A-shares through mechanisms like the Stock Connect programs has made them a more viable option for global asset allocation strategies34. These programs allow international investors to trade A-shares more easily, subject to daily quotas and specific eligible securities32, 33. This has led to A-shares being increasingly incorporated into global equity benchmarks, enhancing their relevance for passive investing strategies such as exchange-traded funds (ETFs) and mutual funds that track these indices30, 31. Furthermore, A-shares can serve as a gauge of domestic Chinese market sentiment, which can differ from the sentiment reflected in other Chinese share classes listed offshore29.
Limitations and Criticisms
Despite increasing openness, the A-share market still presents certain limitations and criticisms for foreign investors. One significant aspect is the continued presence of capital controls, which are government measures that restrict the flow of capital in and out of a country. While these controls have been relaxed over time, they can still affect the liquidity and flexibility for foreign investors in the A-share market, as they influence currency conversion and repatriation of funds27, 28. Critics argue that capital controls can increase the cost of capital and reduce the availability of external financing for firms, potentially hindering investment and economic growth25, 26. Some economists also suggest that such controls may lead to corruption and tax evasion.
Another limitation is the market's high participation by retail investors, who often have shorter investment horizons and engage in more frequent trading compared to institutional investors24. This can contribute to higher volatility in the A-share market compared to other major global equity markets23. While the Stock Connect programs have improved access, certain operational issues, such as settlement mechanisms, have historically posed challenges for international institutional investors. Furthermore, the dual-listing phenomenon, where the same company issues both A-shares and H-shares, can lead to valuation differences, with A-shares sometimes trading at a premium to their H-share counterparts22.
A-Shares vs. H-Shares
A-shares and H-shares both represent equity ownership in Chinese companies, but they differ significantly in their trading venues, currency denomination, and accessibility to investors. A-shares are shares of mainland China-based companies that trade on the domestic Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE), and they are denominated in Chinese Yuan (CNY)20, 21. Historically, A-shares were primarily restricted to mainland Chinese citizens, with foreign access gained mainly through specific qualified investor programs or, more recently, through the Stock Connect schemes19.
In contrast, H-shares are shares of mainland Chinese companies that are listed and traded on the Hong Kong Stock Exchange (HKEX)17, 18. These shares are denominated in Hong Kong Dollars (HKD) and are generally freely tradable by all investors, including foreign investors, without the same level of restrictions as A-shares15, 16. The primary difference lies in their investor base and market regulations; A-shares are largely influenced by domestic sentiment and mainland Chinese regulations, whereas H-shares reflect broader international investor interest and adhere to Hong Kong's regulatory framework, which often aligns more closely with international accounting and reporting standards13, 14. Companies can sometimes issue both A-shares and H-shares, leading to potential price discrepancies between the two share classes for the same underlying company12.
FAQs
Q: Can foreign individual investors directly buy A-shares?
A: While traditionally restricted, foreign individuals working in China or holding a Chinese permanent resident ID card may be able to open an A-share account directly11. For most international individual investors, access is typically indirect, through mechanisms like the Stock Connect programs or investment funds that hold A-shares9, 10.
Q: What is the Stock Connect program?
A: The Stock Connect program is a cross-boundary investment channel that links the Shanghai and Shenzhen Stock Exchanges with the Hong Kong Stock Exchange7, 8. It allows investors in Hong Kong and other international markets to trade eligible A-shares (Northbound trading) and mainland Chinese investors to trade eligible Hong Kong shares (Southbound trading)5, 6.
Q: Are A-shares included in global equity indices?
A: Yes, A-shares have been gradually included in major global equity indices, such as the MSCI Emerging Markets Index, since 20183, 4. This inclusion has increased their representation in international investment portfolios.
Q: What currency are A-shares traded in?
A: A-shares are denominated and traded in Chinese Yuan (CNY), also known as Renminbi (RMB)1, 2.