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MSCI says it will be gradually adding China A shares into its indexes. These are the 222 large cap stocks listed on Chinese exchanges, including such big names as Bank of China, China Life, Ping An, China Mobile and Tsingtao Brewery.

Chinese A shares have been under consideration for inclusion in the MSCI benchmark emerging market index. This has created something of a furore among some US fund managers who worry about the fact that China is a decelerating economy and about the governance levels at some Chinese companies.

However the decision also represents important recognition that Chinese companies, particularly the bigger ones, are becoming larger, more sophisticated and more mature. In addition, they are gradually waking up to the benefits of having foreign investors as an alternative source of capital.

This is not to say that as emerging market stocks they are not risky, but one could argue they are as risky, perhaps less so, than AIM shares.

So what are China A shares in reality?

China A shares will not be included immediately in the indexes, hence immediate reaction in Shangahi was muted. Your traditional A-share is a company incorporated in mainland China, with shares listed on the exchanges in either Shanghai or Shenzhen. These contrast with H-shares, which are mainland companies listed on the Hong Kong Stock Exchange.

While investment in A-shares has been difficult in the past, the government in China has started to make things easier for foreign traders. However, most of the opportunities exist for larger investors like fund managers. Most private traders will either trade H-shares in Hong Kong or N-shares in New York. These are generally preferred because the companies need to meet tougher  governance criteria to list on these exchanges. In addition, H-shares and N-shares are not demoninated in renminbi, stripping out the foreign currency risk. H-shares are denominated in HKD, which is currently pegged to the USD.

China A shares also bring with them other issues

The government in China likes to intervene in the stock market periodically, using institutions designated as the National Team – these are banks and brokers that will buy the market when they get the nod from Beijing. Their support means they end up sitting on large quantities of A-share stock which they will then offload again once prices have crept up.

In addition, there has been a lot of money flowing out of China this year. Some of this has been going into the H-share market, while the Bitcoin market has been another potential avenue, as has foreign property. China is already starting to crack down on this outflow, and foreign holders of A-shares may experience difficulty in getting cash out if such restrictions become more severe.

Trading China A shares

Those determined to trade A-shares can look at opening an account to trade shares via HK Stock Connect, which now allows two way trading between the Hong Kong and Shanghai markets.

Most traders in Hong Kong are staying clear of this at the moment. The lack of enthusiasm could be down to simply a lack of trust – will they be able to get their money out of China easily should they need to sell their stocks quickly? Ultimately, the determined investor will be one who will want to buy stock not available on foreign exchanges.

Currently the China A shares market will likely remain the province of hedge funds and other asset managers. Those with the inclination can do worse than trade N-shares in New York, where companies like Acorn International, China Southern Airlines, Petrochina and Sinopec Shanghai Petrochemical all enjoy listings. In addition, there are also N-shares on NASDAQ, including Baidu and Perfect World.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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