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China is a country with several different markets, as we have in the U.S too. A big difference is that all of our markets are denominated in one currency, and all of our markets are open to anyone with the money to make a purchase – with the exception of citizens from a few State Department embargoed countries, such as Cuba and Iran.

China on the other hand, has several markets, but they are not all denominated in the same currency, and they are not all open to all investors.

Sometimes it is confusing when reading headlines about China’s stock markets to be fully sure which markets are in focus.

China investment debates sometimes get confused when people are disagreeing over facts when each side of an argument is correct concerning the market they are referencing, while not understanding that the other side is talking about another China market.

The different China markets have performed dramatically differently. Differentiation between them is essential for effective debates and decisions.

Chart of Different Key China Markets

(source: NLI Research Institute, Japan).



Share Class Type Definitions:

(source: FTSE Xinhua Index)

A-Shares:
Securities of Chinese incorporated companies that trade on the Shanghai or Shenzhen stock exchanges, quoted in Chinese Renminbi [RMB]. Traded by residents of the People’s Republic of China [PRC] or international investors under the China Qualified Foreign Institutional Investors [QFII] regulations.

B-Shares:
Securities of Chinese incorporated companies that trade on the Shanghai Stock Exchange (quoted in US Dollars) or the Shenzhen Stock Exchange (quoted in Hong Kong Dollars – HKD). Traded by both non-residents of the PRC and residents with appropriate foreign currency dealing accounts.

H-Shares:
Securities of companies incorporated in the PRC and nominated by the Chinese Government for listing and trading on the Hong Kong Stock Exchange, quoted and traded in HKD. Those from the PRC are not allowed to trade H shares however there are no restrictions on international investors.

Red Chip Shares:
Securities of Hong Kong incorporated companies that trade on the Hong Kong Stock Exchange, quoted in HKD. The constituents are substantially owned directly or indirectly by the Chinese Government. Those from the PRC are not allowed to trade H shares however there are no restrictions on international investors.

FXI (benchmarked to the FTSE/Xinhua China 25 Index)
(source: FTSE Xinhua Index)

The FTSE/Xinhua China 25 Index includes the largest 25 Chinese companies comprising H Shares and Red Chips, ranked by total market capitalization with a fund imposed 10% cap on portfolio weight for an one company.

As you will note in the table below, between adjustment periods, a position may exceed 10%.

FXI Portfolio (as of 1/31/2007) sponsored by iShares (Barclay’s)
(source: iShares)

As of June 2006 the mix of H-Shares and Red Chip Shares for FXI was 61.22% and 38.88% respectively.

Disclosure: The author does not have a position in FXI as of this writing.

Source: Making Sense of Chinese Markets