China’s capital markets were historically off-limits to foreign investors, but the country’s drive toward the modernization of its economy has opened up opportunities and investments. Despite the pandemic, the IMF predicts that China will report further growth this year and beyond – also boosting China’s stock exchanges.

Brief history of China’ stock exchanges

China’s securities market began as early as the late 1860s following the establishment of the International Settlement in Shanghai. This is the result of the 1842 Treaty of Nanking and subsequent agreements between China and other countries.

The International Settlement was crucial in developing the country’s stock market because it helped create conditions conducive to its emergence. These include the presence of several banks, the establishment of a legal framework for joint-stock companies, and the creation of interest in diversification.

Shanghai Sharebrokers’ Association served as China’s first stock exchange in 1891 during the mining shares boom, and the Shanghai Stock Exchange was established in 1929. It closed down in 1949 following the Communist revolution in the country.

After the Cultural Revolution ended in 1978, China slowly started opening up again to other nations. Economic reform led to the development of its social market economy. The Shanghai Stock Exchange reopened in November 1990 and started trading the following month.

China’s stock exchanges

China has two stock exchanges on the mainland, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). The Hong Kong Stock Exchange (HKEX) is somewhat considered part of the country’s stock market due to its integration into the other Chinese stock exchanges.

The SSE is China’s largest stock exchange and is currently the third largest stock exchange in the world based on market capitalisation. As of January 2021, the Shanghai Stock Exchange has 1,860 listings, most of which are state-owned companies, and has a market capitalisation of $6.98 trillion.

Meanwhile, the SZSE is the smaller of the two mainland stock exchanges, ranking sixth globally with a market capitalization of around $5 trillion. The Shenzhen Stock Exchange has 2,375 listings as of January 2021 and caters to smaller, privately-owned businesses that are considered more profitable and innovative.

Also known as the Stock Exchange of Hong Kong, the HKEX serves both as a stock market and a derivatives market. The Shanghai-Hong Kong Connect program linked the HKEX with the SSE in 2014 and the SZSE in 2016.

With this, foreign investors can buy shares listed in the mainland stock exchanges, which were previously only available to Chinese investors and select foreign fund managers. Some companies listed in SZSE and HKEX are priced lower in the Hong Kong exchange, attracting Chinese investors to trade in the HKEX.

Main stock indices in China

The SSE Composite Index or SSE Index is the main index that tracks all stocks listed on the Shanghai Stock Exchange. Similar to the S&P 500, the SSE Index tracks all A-shares and B-shares weighted by the total shares issued. This means that price changes among large firms affect them more than smaller companies.

The main stock market index of the SZSE is the SZSE Composite Index, which tracks all of the A-shares and B-shares on the exchange and is also a capitalization-weighted index like the SSE Index.

Lastly, the Hang Seng Index or HIS is the main market index of the HKEX. It is a market capitalization-weighted index that tracks the prices of the largest firms listed on the exchange, which comprise about 65% of the total market capitalization. Under the HSI are the Commerce and Industry, Finance, Utilities, and Properties sub-indices.

A-Shares, B-Shares, and H-Shares

In these exchanges, listed companies in China may issue A-shares, B-shares, and H-shares.

Chinese A-shares are offered by companies incorporated in mainland China. They are only quoted in renminbi or Chinese yuan (CNY). Meanwhile, B-shares are essentially the same as A-share, except they are quoted in foreign currencies, particularly in US dollars (USD).

A-shares are generally available only to local investors and a select number of Qualified Foreign Institutional Investors (QFIIs). On the other hand, foreign investors primarily invest in Chinese firms through B-shares.

Meanwhile, H-shares refer to stocks of Chinese firms listed on the HKEX, which are quoted in Hong Kong dollars (HKD). H-shares are available to both Chinese and foreign investors alike. For firms that offer both A-shares and H-shares, some local investors prefer the H-shares because A-shares are generally offered at a higher price than H-shares.

How to gain access to China’s stock market

Foreign investors looking to take advantage of the Chinese stock market may either invest through an exchange-traded fund (ETF) that tracks one of China’s stock exchange indices mentioned above or use an actively managed mutual fund.

ETFs, which provide low-cost, beta exposure to Chinese shares, include the iShares MSCI China A ETF, Invesco Golden Dragon China ETF, and the iShares MSCI China ETF. Among the most effectively managed funds with Chinese exposure are the UBS (Lux) Equity China Opportunity Fund and the Allianz China A-shares Fund.

Learn more about how to get exposure to China’s stock market here.