Three ways to buy H shares

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With the Chinese goverment recent policy of “opening H shares to domestic investors”, there are three ways to buy H shares for China domestic investors, and people with different investment objectives and pockets can pick and choose.

1) QDII: there are many bank issued QDII products. Those products mostly invest in H shares, and it’s very likely the fund managers will buy something they are familar, the Chinese companies listed in Hongkong. This is indirect way of buying H shares; it carries modest risk and the return will also be moderate.

2) Open an account in Hongkong Stock Exchange directly: this is not officially endorsed by the Chinese regulators. But many people have done that, and I think those people at least enjoyed the recent “bump” after the “China life gate to H shares” news. In reality, I think those are “forward thinking” investors, and they usually have deep pockets. The down side of this approach is: it’s difficult to get the money in and out of China, because that’s not blessed by the goverment.

On a related matter, one can also open account in a US brokage firm and trade US stocks. The procedures will be simiar to the one above. Note many Chinese ADRs traded in NYSE are priced the same as Hongkong (consider the currency, and ADR units conversion).

3) The new and offical approach: open a stock account through Bank of China International, and deposit the money through Bank of China. One needs CNY 100,000 to do this. The good: goverment blessed it. The bad: the minimum balance requirement; late to the party, etc.

Personally I don’t think this latest policy will have significant long term effect on Chinese H shares, it did have some short term effect as you have already seen. Because some people think many H shares are bargain compared to their A share equivalents. But there are flaws in this logic:

1) What if A shares are already over priced?

2) Smart investors have already been in the Hongkong market for a while. There will be some late comers, but there won’t be many. If China opens more institutional investors (like QDII) to H shares, that will different story.

So what’s the bottom line? I think there may be some arbitrage oppertunities (different prices for same company stocks), but don’t solely buy stock from this perspective. In my mind, the thing matters more is a company’s fundamental, not the H share discount vs. A share.

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