China is on just about every investor's tongue these days. China this, China that.
The Chinese government has made it easier to invest in Chinese securities over the years, but trying to figure out the various share classes of Chinese companies is still confusing. Jim Rogers, former partner of George Soros and longtime commodities bull, provides simple and clear insight into the Chinese market in his new book, A Bull in China.
These are the shares listed on the Shanghai or Shenzhen exchanges. They are primarily available to domestic Chinese investors, with some exceptions for large, qualified institutional investors. If you are investing individually, odds are you don't own the A-shares. Lately A-shares have commanded a premium over their B-share counterparts because of an overwhelming demand by locals, coupled with the fixed supply of shares.
A few months ago, news headlines declared that oil company PetroChina
These shares were created to allow foreign investors using foreign currency to invest directly in China. When they were first issued in the 1990s, eager foreigners jumped to invest. Today, most companies don't issue B-shares, as they are deemed a bit cumbersome, and most individual foreign investors choose to participate in the other class shares.
Hong Kong's favorable market environment suggests that most foreign investors participate in China via H-shares. The country's prestigious companies prefer to list H-shares in Hong Kong, and foreign investors prefer them because they are free of most restrictions that exist inside China. The shares are traded in convertible Hong Kong dollars, making it very simple for foreigners.
Some Chinese companies choose to list American depositary receipts. Basically, a Chinese company with shares listed abroad will sell shares to an investment bank that agrees to act as an intermediary and underwrites the ADRs on a foreign exchange backed up by the holdings of the original listing.
Issuing ADRs requires companies to meet the listing requirements of the U.S. exchanges. Some requirements are a bit onerous, but I tend to view them as the best in the world, regardless of imperfections. Investors looking at ADRs know there has been some vetting of the companies.
Leftover alphabet soup
There are several other classes of Chinese shares. Every market in the world is eager to ride the China boom and are trying to get China to come to them.
L-Shares: Chinese companies listed on the London Stock Exchange.
J-Shares: Chinese companies on the Tokyo Stock Exchange.
N-Shares: These shares are listed on the NYSE or Nasdaq. They were more popular years ago, before the Asian markets developed and became more sophisticated. Sina.com
(NASDAQ:SINA)is listed on the Nasdaq this way.
S-Shares: Shares listed on the Singapore exchange.
Now you know your ABCs
As confusing as these share structures might be, most investors stick to the shares in their home market or Hong Kong. As the Chinese markets evolve, expect these listings to change. For now, whether you invest in China, the U.S., or anywhere else, stick to your circle of competence.
Fool contributor Sham Gad is managing partner of the Gad Partners Funds. He has a stake in Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. The Fool has an immortal disclosure policy.
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