Buzz over shares

PUBLISHED : Wednesday, 23 May, 2007, 12:00am
UPDATED : Wednesday, 23 May, 2007, 12:00am

A senior business reporter with the South China Morning Post looks at the options available for stock market investors in China and Hong Kong

Novice investors have a multi-coloured alphabet of options if they're looking to buy shares on the stock market. Blue chips, red chips, A shares and B shares - it's enough to make anyone feel like it's the first day of school all over again.

The reason for the mass of letters and colours used to name the different kinds of shares listed on China's stock exchanges is mainly bureaucracy and regulations. Governments have set rules that they hope will protect investors, limiting them from buying certain shares, and making clear the difference between mainland and Hong Kong companies.

In the case of the mainland regulators, they have also done this to make it more difficult for foreign investors to invest in, and potentially manipulate, mainland markets.

Red and blue

In Hong Kong, you generally have access to red chips, blue chips and H shares. H shares and red chips are shares of mainland companies that trade in Hong Kong, with small differences between the two. Anyone can trade these shares, and they probably make up a large portion of any Hong Kong stock portfolio that you own.

If you want to invest in only the safest, oldest, least-risky companies, you'll likely buy blue chips. This is a term used around the world to describe the big names in business.

A shares and B shares are listed on mainland markets, and most foreign investors have access only to B shares. The lion's share of stock traded on the mainland is in A shares.

However, these shares trade in yuan, and are available only to Chinese residents and certain banks and money managers that have special permission from the government. Much of the buzz over soaring Chinese stock markets has been based on rising prices for A shares as mainland investors move their money from banks into the stock market.

B shares, which trade on the Shanghai and Shenzhen stock exchanges, are priced in US dollars in Shanghai and Hong Kong dollars in Shenzhen, and they are open to foreign and domestic investors.

Mixed markets

The lines marking who can invest in which shares are slowly being blurred as the markets develop and governments loosen the rules. Mainland investors are increasingly coming to Hong Kong to open H share accounts. It's a bit ironic that they're coming from the mainland to Hong Kong to invest in mainland companies.

However, listing in Hong Kong carries some prestige over listing shares in Shenzhen or Shanghai, as Hong Kong regulators are seen as being stricter. And if your company can list its shares under stricter rules, investors view it as a better-run company and safer investment.

There has long been talk of China merging its A and B share markets, since B share trading is far overshadowed by the frenzied domestic speculation in A shares. Because the A share market has become dominant, many company B shares trade at much cheaper prices than their A shares.

Foreigners have not flocked to the B share market as the government expected they would when the market was created. Instead, foreign investors have preferred to invest in Hong Kong's stock market, buying Chinese companies via their red chips or H shares.