China's equity markets are undeniably complex. Because there are several stock exchanges and several types of shares. Because you sometimes have to juggle three different currencies. Because the invisible hand of the market coexists with the hand of the Chinese Communist Party. Because the alphabet and languages are different. Because obligations in terms of information transparency are not as formatted as in Western markets. And for many other reasons too.

In this article, we won't go into too much detail, in order to concentrate on the overall structure of Chinese stock exchanges and index-tracking.

What are the main Chinese stock markets?

Let's start with a few generalities. There are currently three major equity markets in China, plus a fourth in the making:

  • The Shanghai Stock Exchange (or SSE): this is the oldest (1990) and the largest in size (currently around $6,300 billion, compared with $2,500 billion for the French market and $40,800 billion for the US). All types of instruments are listed (equities, bonds, derivatives, etc.). The market is divided into two "boards": the "Main", where Chinese blue chips are traditionally listed, with a focus on the domestic market. And the "STAR" board, which features fast-growing technology companies (biotechs, 5G, new energies, etc.), again with a domestic focus.
  • The Shenzhen stock exchange: launched after the SSE to compete with it, it is smaller in size ($4,400 billion in cumulative capitalization at present). Its distinctive feature is that it tends to attract companies from the manufacturing sector. All types of instruments are listed, and the market is divided into two "boards": the "Main", where the heavyweights of the manufacturing sector are traded, in particular those controlled by the party; and the "GEM" (Growth Entreprise Market) board, ChiNext, which is a small-cap equivalent to enable innovative start-ups (in robotics, for example) to raise capital.
  • The Hong Kong stock exchange (or Hang Seng): this is the privileged interface between the Chinese market and international investors. The city-state boasted a legal system of exceptional integrity, modelled on the British model in its heyday and jealously guarded ever since, as well as a currency directly indexed to the US dollar. These two guarantees of stability reassured foreign investors and offered them an ideal gateway to the Chinese market. It was also open to foreign companies wishing to set up a listing, even a major one (e.g. L'Occitane en Provence). Unfortunately, this advantage is being rapidly eroded as Beijing "reintegrates" Hong Kong.
  • Beijing Stock Exchange: this market was launched in September 2021. Less regulated, it is the heir to the NEEQ (National Equities Exchange and Quotation) and the equivalent of the American OTC market. It is therefore focused on smaller-cap stocks with lighter obligations. The BJSE, the second tier of the Chinese market after Shanghai and Shenzhen, focuses on small and medium-sized innovative companies. It originates from the "Select Tier", the top level of the NEEQ. The BJSE began trading in November 2021, with 81 listed companies, including 71 transferred from the Select Tier. Companies listed on the BJSE can transfer to the SSE STAR market or the SZSE ChiNext market, or downgrade to the NEEQ.

What types of shares are traded in China?

Companies headquartered in mainland China and listed in mainland China or Hong Kong may issue different classes of shares, depending on where they are listed and which investors are authorized to hold them. These are the A, B and H classes, which are all renminbi-denominated shares that trade in different currencies, depending on where they are listed. Chinese companies registered and listed outside mainland China are generally referred to as "Red Chips", "P Chips", "S Chips" or "N Shares", depending on their shareholding structure, source of income and place of listing. Here are a few facts about these different securities.

  • A shares: these are issued by companies registered in China and listed in renminbi (yuan). These shares are not generally accessible to foreign investors, unless they have QFII (Qualified Foreign Institutional Investors) or RQFII (Renminbi Qualified Foreign Institutional Investors) accreditation, or are eligible for the Stock Connect system. In all cases, the regulator closely monitors and controls "A shares" transactions. On the whole, trading in these shares is reserved for Chinese citizens and institutions. For example, automotive battery star CATL(Contemporary Amperex Technology) is an A share listed in Shenzhen.
  • B shares: these are issued by companies registered in China and listed either in Hong Kong dollars (HKD), if listed in Shenzhen, or in US dollars (USD), if listed in Shanghai. Trading is open to both foreign and domestic investors, provided they have a foreign currency account. The market is rather small (44 "B Shares" on the SSE for 1,664 "A Shares"). For example, the promoter China Vanke has both A and B shares.
  • H shares: these are issued by companies registered in China but listed in Hong Kong. They are the most readily available to foreign investors. The main advantage of "H shares" is to ensure that companies in dire need of non-Chinese capital have the most transparent showcase possible to reassure foreign investors. The biggest names in this category are Meituan, China Construction Bank and Tencent.
  • N shares: these are issued by companies registered outside China but generating the majority of their revenues in China. They are listed on foreign markets (often the NASDAQ), typically in USD. N shares are favored by tech giants Pinduoduo, NIO,com and the inevitable Baidu and Alibaba. They were specially designed to raise capital from North American investors (who wanted US-listed securities denominated in US dollars).
  • Red Chip Shares: these are companies registered outside mainland China (in fact, 99% of the time they are registered in Hong Kong) but listed in Hong Kong, and controlled by the party. Example: Lenovo. They are open to foreign investors... at least those who agree to have the CCP as a "Senior Partner".
  • P Chip Shares: comparable to Red Chip Shares, but privately controlled.
  • S Chip Shares: these are companies incorporated outside mainland China and listed on the Singapore Stock Exchange, whose main executive is based in mainland China and generates the majority of its revenues or holds the majority of its assets there.

How are the indices faring?

Chinese indices have underperformed in recent years, particularly those with the highest international profile, the MSCI China and Hang Seng. Every year, investors hope for an upturn, which is slow to materialize. Please note: as at 26/09/2024, the MSCI China includes 655 companies (A shares, H shares, B shares, red chips, P chips and foreign listings, with Tencent, Alibaba, Meituan, PDD Holding, China Construction Bank, Xiaomi, BYD, Bank of China, Ping An...).

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Since the announcement of measures to support the economic recovery in September 2024, the indices have begun to regain their colors.

What are the main ETFs tracking Chinese equities?

General UCITS ETFs (data as at 26/09/2024) :

  • Franklin FTSE China UCITS ETF ACC USD: the cheapest (0.19% fees)
  • iShares MSCI China UCITS ETF ACC: a large, low-cost ETF (0.28% fees) that tracks the MSCI China. Equivalent to HSBC MSCI China and Amundi MSCI China, less liquid and slightly more expensive.
  • Xtrackers Harvest CSI300 UCITS: a more original ETF, tracking the CSI300 (0.65% fees).
  • iShares China Large Cap-ETF: the world's 3rd-largest Chinese equity ETF, targeting the 50 largest caps listed in Hong Kong (0.74% fees).
  • Kraneshares CSI China Internet UCITS: a large ETF focusing on Chinese technology stocks (0.75% fees).