China Stock Exchanges and Shares

The CSI 300 is a capitalization-weighted stock market index designed to replica the performance of 300 stocks traded in the Shanghai and Shenzhen stock exchanges. The index is compiled by the China Securities Index Company, Ltd. It has been calculated since April 8, 2005. Its value is normalized relative to a base of 1000 on December 31, 2004. S and H are those that got listed in Singapore and HKSE.

Q: What is A shares?
A: These are shares in Chinese companies issued in China under Chinese law. They are denominated in Chinese currency, the renminbi, and are listed on the Shanghai or Shenzhen stock exchanges. Currently, only Chinese residents of China may trade the 776 companies listed in Shanghai, and the 489 companies listed in Shenzhen. Qualified Foreign Institutional Investors (QFII) licence holders and approved foreign investors under the strategic investment scheme. (This scheme permits foreign business entities to take a minimum approved 10% stake in A share companies, but holdings must be held for at least three years). The China Securities Regulatory Commission (CSRC) and China’s State Administration of Foreign Exchange (SAFE) introduced the Qualified Foreign Institutional Investor (QFII) Licence to allow foreign investors to invest in China A shares.

Q: What is B shares?
A: B Shares are foreign-invested shares issued domestically by PRC's companies. B Shares are also known as Renminbi Special Shares. B Shares are issued in the form of registered shares and carry a face value denominated in Renminbi. B Shares are subscribed and traded in foreign currencies and are listed and traded in securities exchanges inside China. The B Share Market came into existence in 1991. By the end of April 1999, there were totally 107 B Share issuers. There were 54 B Share companies listed in Shenzhen with a total capitalization of RMB10.94 billion whereas there were 53 B Share companies listed in Shanghai with a total capitalization of RMB9.778 billion. The B Share Market has attracted a considerable amount of foreign investors. The Market provides an additional channel for foreign capital thereby enhancing the progress of the evolvement of PRC's securities market.

Q: What is H shares?
A:H shares are shares in Chinese companies issued in China under Chinese law. They are listed on the Hong Kong Stock Exchange and subject to its stringent listing and disclosure requirements. The shares are denominated in H.K. dollar and trade like any other shares listed on the Hong Kong Exchange. There are now 91 companies offering H shares giving exposure to more than a dozen sectors including Telecommunications, Insurance, Real Estate, Airlines, Logistics as well as Infrastructure such as roads and electricity, Oil, Mining and Basic Materials such as steel, cement, aluminum and petrochemicals. They are required to meet the same standard of disclosure required of all companies listed on the SEHK.

QDII was initially proposed by the Hong Kong government to introduce mainland capital to the Hong Kong securities market and to attract more international capital, which was significant to the low-priced Hong Kong securities market after the Asian financial crisis. When QDII was first proposed, the China Securities Regulatory Commission was enthusiastic in promoting the scheme. On the other hand, the State Administration of Foreign Exchange's response was lukewarm, due to foreign exchange control concerns. However, now the table has been turned. Due to growing pressure on the appreciation of renminbi, SAFE is now more active in promoting the scheme, to maintain the stability of the RMB exchange rate, but the Securities Regulatory Commission is becoming more conservative, because the formal adoption of such a scheme might affect the A and B share markets.

Hua'an Fund was the first pilot project for QDII and was only allowed to use hard currency, instead of RMB, for its investment, to reduce risks in connection with QDII. Many banks in China are laying the ground work in preparation for the formal adoption of QDII. While the attitude of various government departments is becoming more receptive to QDII, it is unclear when the scheme will be formally adopted in China.

Judging by successful experiences from other countries and districts, QDII is an effective scheme to assure the steady transition of all market aspects during the gradual process of opening the domestic market to foreign capital. With the process of opening up the domestic securities market, the full adoption of QDII is only a matter of time.

QDII subscriptions much larger than expected
When China Southern Asset Management launched its Global Selected Allocation Fund last month, the subscription period was originally scheduled to run from 12 September to 28 September. The fund was however closed on the first day when subscriptions hit RMB50bn (US$6.67bn). This was way above their initial target and QDII limit of US$2bn. The regulators however expanded China Southern's QDII quota, allowing the size of the fund to be doubled to US$4bn. The mandate of the Fund is to invest in global stock markets. The fund manager is understood to be targeting five developed market and five emerging markets: the US, Japan, Switzerland, Italy, Hong Kong, Russia, India, Brazil, Malaysia and South Korea. 40% of the fund is expected to be invested in Hong Kong and 60% in global markets through fund of funds. The sub-advisor of the fund is Bank of New York Mellon Asset Management.

China Asset Management's QDII fund, launched last Thursday, drew an even higher level of subscription. It attracted US$8bn, exceeding the limit of US$4bn, and the subscription period also closed early. The fund will invest in overseas stock markets including the US, Europe, Japan, Hong Kong and other emerging markets. The consultant to the fund is the T. Rowe Price Group.

Harvest Fund Management, a joint venture with Deustche Bank, is expected to launch its QDII fund on 9 October 2009. The Harvest Fund will focus on H-shares, red chips and Chinese stocks listed in the US and Singapore (S-chips). It is understood to be looking to increase its QDII quota to US$4-5bn. The news of the pending launch of the Harvest Fund was apparently one reason for the rally in S-chips last week.

The QDII scheme (Qualified Domestic Institutional Investor) was actually launched in April 2006 but had a very slow start partly because of restrictions in what the QDII funds could invest in and partly also because of the strong performance of the domestic A-share market. Under the old scheme, banks and insurance could only offer overseas fixed income products with overseas equity products restricted to asset management houses. Under the latest QDII guidelines, banks and insurance companies can now offer equity (up to 50% of their QDII quota) as well as fixed income products. QDII equity products have also been extended to securities houses. The range of overseas markets allowable under the scheme has also been widened.