An Overview of H-Shares
H-shares are stocks that trade on the Hong Kong Stock Exchange of companies which are headquartered in mainland China but are incorporated outside of the mainland. H-shares typically refer to stocks listed on the Mainland Exchange that are either incorporated in Hong Kong or have a substantial presence in Hong Kong. The inclusion of these stocks on the Hong Kong Exchange began in February 1993, when the Mainland China-based firm China Resources Enterprise became the first such company to be listed on the exchange.
In terms of ownership structure, the majority of H-shares are owned by Chinese individuals and corporations, while a minority of the shares are held by foreign investors. In comparison to A-shares (stocks listed on Chinese exchanges), H-shares tend to be more liquid and easier to access for international investors. While H-shares tend to trade at a lower level than A-shares due to the fact that A-shares are favored by domestic investors, H-share companies typically hold stronger financials and better corporate governance practices.
H-shares provide an opportunity for investors who are looking for exposure to corporate China and its economy. Furthermore, these stocks tend to provide an additional cushion for investors who may be exposed to the volatility that often accompanies stock exchanges in emerging markets, particularly in mainland China.
H-Share Market Performance
Since its creation in 1993, H-shares have become increasingly popular with investors and have, as a whole, significantly outperformed the domestic A-share market. According to recent figures, the cumulative total return of the H-share index has been almost 18-fold that of the A-share benchmark, while the H-share index has seen an average annual return of 12.51%, compared to 5.32% for the A-share index.
In general, the H-share market has seen a steady growth since its inception, though some companies have struggled due to the influence of politics, economic volatility, and decreased demand for their products or services. Recently, H-shares have seen increased volatility because of macroeconomic conditions, such as the United States-China trade war, as well as policy developments in mainland China, such as relaxations on foreign ownership limits.
Pros and Cons of Investing in H-Shares
The primary benefit of investing in H-shares is the access they provide to mainland Chinese companies, allowing investors to diversify their portfolios and hedge against uncertainty in the mainland markets. Additionally, since H-shares are traded in Hong Kong, the overall trading environment is more transparent and regulated than in the mainland markets.
On the other hand, investing in H-shares carries the risk of high volatility—as the mainland Chinese markets and the Chinese economy as a whole may move in a different direction than the Hong Kong exchange. Furthermore, there are limitations on foreign ownership of H-shares, and investors must understand these restrictions before investing.
Conclusion
H-shares provide an opportunity for investors to gain access to companies in mainland China and diversify risk across major markets. H-shares also tend to be more liquid, stable, and transparent than their A-share counterparts. However, it is important to note that investing in H-shares carries its own risks and limitations, and investors should exercise due diligence before investing.
