A-Shares, B-Shares, Red Chips, P-Chips. Dr. Seuss would have a field day with the many types of Chinese shares.
Every stock market is organized around some taxonomical classification. Most, as in the United States, are defined by company size as determined by its market capitalization (total market value of a company’s shares outstanding). We tend to think about the US stock market in four major categories: large cap, mid cap, small cap and over the counter stocks.
In the People’s Republic of China (PRC), however, the major criteria regarding the classification of a stock is whether the company is incorporated on the mainland and on which stock exchange it trades.
These complications are the result of China’s tightly controlled economic opening up and market reform which began in the late 1970s. The restrictions on foreign ownership led to a convoluted system that separated Chinese domestic investors from foreigners. Companies utilized myriad ways to list on public exchanges leading to the current state of affairs for investing in Chinese companies:
- A-Shares: Companies incorporated in the PRC and listed on the Shanghai or Shenzhen stock exchange; until 2014, only Chinese citizens could invest. Still has some restrictions on foreign investors.
- B-Shares: Companies incorporated in the PRC, listed on Shanghai or Shenzhen exchanges but open to foreigners. Quoted in USD or HKD.
- H-Shares: Companies incorporated in the PRC, listed on Hong Kong stock exchange; often have A-Share listings as well.
- Red Chips: Companies incorporated outside of the PRC, listed on Hong Kong exchange. Companies are controlled by PRC state, provinces or municipalities.
- P-Chips: Companies incorporated outside of the PRC, listed on Hong Kong exchange. Companies are controlled by a PRC individual, derives 80% of revenue from the PRC and allocates 60% of assets to the PRC.
These five classifications are defined by MSCI, a major index provider. Others, such as FTSE and Standard & Poor’s have their own classification system and include different share types- L-Shares, for companies listed in London; N-Shares for companies listed on the New York and NASDAQ exchanges. This means that each index will have different compositions which is why it’s important to know which benchmark is being used as a comparison to the stock or ETF in consideration. It’s degree of onshore/offshore exposure could affect performance.
With the easing of restrictions on foreign investment and the opening of the Shanghai-Hong Kong Stock Connect program, it is very likely that we will see a consolidation of these share classifications over time as companies find these multiple listings a redundancy rather than an opportunity to attract a greater number of investors.