All Chinese stocks share the strengths and weaknesses of China: for example, blazing economic growth on one hand and questions about lack of market standards on the other. Please see the page with the story, “To Leap or Not to Leap” for more details on what is unique about China and the Chinese companies that sell stocks.
That said, there are still significant differences among the considerable variety of Chinese stocks, differences that may make one more desirable to an investor than others.
*A shares. What they are: The biggest market. Formerly, only domestic Chinese investors could buy these shares, traded on exchanges in Shanghai and Shenzhen. And they could buy only these shares, which are denominated in Chinese currency, Renminbi.
In the past few years foreign and Chinese institutional investors gained access to formerly restricted markets. Overseas investors have a limited right to buy A shares (actually virtual A shares) through the Qualified Foreign Institutional Investor program (QFII). Chinese institutional investors can purchase foreign stocks under the Qualified Domestic Institutional Investor scheme (QDII). Chinese authorities plan to allow retail domestic investors to buy Hong Kong stocks through a program commonly called the “Through Train.” And as is common in China, enterprising Chinese investors are finding a way to buy on the Hong Kong market through backdoor channels.
Why they’re important: For you, the average investor, yes A shares are important even though you can’t buy them. The reason is that your counterparts in China have no other attractive place to put their (considerable) savings, so they have bid A share prices through the roof. And many of companies with A shares are also listed in Hong Kong, New York and other foreign markets. The overseas shares are much cheaper, often by 30% to 40%.
As more Chinese invest in foreign markets, legitimately or otherwise, they will take money out of A shares and buy stocks in the same companies more cheaply overseas. Hong Kong is the main beneficiary, and you can buy stocks there or purchase funds with Hong Kong stocks. Local and institutional buyers drove Chinese companies listed in Hong Kong up 55% in 2007, partly in anticipation of a huge inflow of investment from China in coming years.
So, basically, it’s the gap in prices between A shares and overseas shares in the same companies that can make money for U.S. retail investors.
Be careful. Any market flying as high as the A share market runs the risk of a crash. (Again, see the page with the story “To Leap or Not to Leap.”) There’s a good chance rapid growth in company profits and Chinese government tightening measures will prevent a crash, but there’s no guarantee.
*B shares. What they are: comparatively tiny market traded on the Shanghai and Shenzhen exchanges. Restricted to foreign investors. Chinese authorities originally intended B shares to be the main gateway for overseas investors, but the market was soon overshadowed by Chinese companies trading on the more developed Hong Kong exchange (H shares). B shares have languished since.
Why they’re important: There are some good buys on the market. P/E ratios are considerably lower than for A shares. An eventual merger between B and A shares is widely expected, and that would raise B stock prices closer to the nosebleed level of their domestic-only brothers.
Be careful. The overwhelming majority of B shares are not investment grade by U.S. standards.
*H shares. What they are: more than 110 of the better Chinese companies, listed in Hong Kong. They include giants like PetroChina, the world’s first $1 trillion company in terms of share market capitalization after its recent listing in Shanghai. Energy, metals and mining, finance and tech stocks are amply represented.
Why they’re important: Growth prospects are good because H shares are cheap compared to stocks of the same companies listed in China. As noted above, money will almost certainly flow from the extravagantly priced A shares to H shares as domestic Chinese investors gain greater rights to invest overseas.
Be careful. H shares soared a heady 51% in 2009 through mid-August. Rock-bottom interest rates and the weak U.S. dollar may fuel even more growth, but those conditions should evaporate as the global economic recovery takes hold. Then, H share prices will likely tumble. And a crash in high-priced A shares would rock the H share market.
*ADRs (American Depository Receipts), sometimes called “N” shares because many are traded on the New York Stock Exchange. What they are: Chinese companies listed on the NYSE, NASDAQ and Over the Counter Bulletin Board (OTCBB). Why they’re important: ADRs follow U.S. listing standards and are easier for U.S. investors to buy. They include most of the Chinese heavyweights, such as China Mobile and PetroChina.
Be careful. They do not include the range of Chinese companies traded in Hong Kong, and research is not as plentiful as it is in Hong Kong.
*Red chips. What they are: listed Hong Kong companies whose mother companies are large Chinese enterprises. Why they’re important: includes some major companies such as China Mobile. Some red chips combine Western-style management with deep pockets of Chinese parent companies. In late summer 2009, prices of big red chips like China Mobile soared on expectations they would soon get a windfall from IPOs on the Shanghai market. Shanghai is swimming in liquidity, and new listings for big companies will attract huge amounts of money.
Be careful. Red chips are as likely to be overheated as H shares.
*China plays. What they are: various foreign companies manufacturing or doing other business with China. There are some 3,000 such firms in countries around the world. Why they are important: In addition to offering a wide range of companies, China plays meet the standards of governance and stock listings of their home countries.
Be careful. China plays are often only partly exposed to China. Some institutional investors now avoid those tied to China’s exporting sector in favor of those involved in Chinese domestic consumption.
Prices of Chinese companies listed on more than one overseas stock exchange are more or less the same.
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