The aim of this entry today is to highlights the functioning of Chinese Stock Exchanges, therefore I am going to expose the main elements investors need to know when entering capital markets.
Basic Elements Investors Need to Know about Chinese Stock Exchanges
The Shanghai Stock Exchange (SSE,
http://english.sse.com.cn/
) is a membership institution closely monitored by the China Securities Regulatory Commission (CSRC). It bases its development on the principle of “legislation, supervision, self-regulation and standardization.” Its functions are providing a marketplace and facilities for the securities trading; formulating business rules; accepting and arranging listings; organizing and monitoring securities trading; regulating members and listed companies; managing and disseminating market information. (SSE is open for trading from Monday to Friday. In the morning session, the market opens with a call auction between 9.15 am and 9.25 am, which is followed by a continuous auction between 9.30 am and 11.30 am. The afternoon session begins with a continuous auction between 1.00 pm to 3.00 pm and then block trading takes place between 3.00 pm–3.30 pm. The market is closed on weekends and public holidays).
The Shenzhen Stock Exchange (
http://www.szse.cn/main/en/
) also is a membership institution closely monitored by CSRC. Like the Shanghai Stock Exchange, stocks are further divided into A-Shares and B-Shares, with A-Shares limited to domestic investors and limited foreign investors, while B-Shares are available to domestic individuals and foreign investors. This Exchange is now composed of its main board, small and medium enterprises board, and ChiNext, a notable new board established for growth enterprises in 2009. Securities listed on SSE fall into four categories: Stocks, bonds, (collective) investment fund units and warrants. Stocks are further divided into A-Shares and B-Shares. Trading in Both A- and B-Shares and investment funds is subject to a 10% daily price up and down limit, except for the first trading day. Special treatment shares (ST) are subject to a 5% daily price up and down limit. The price limits on warrants are based on that of their corresponding underlying securities and are determined by multiplying the conversion ratio by a certain coefficient. The price of a block trade of securities with a price limit is determined by the buyer and seller within the price limit applicable to such securities on the day of trading. The price of a block trade of securities without any price limit is negotiated by the buyer and seller within 30% of the previous closing price or between the highest and lowest traded prices on the day of trading. In the absence of any transaction for a particular stock, the closing price of the previous trading day will be the execution price. (Trading on the Shenzhen Stock Exchange is driven by orders on price-time priority. A price limit of 10% is imposed for common stocks and 5% for stocks under special treatment. The market trades four hours a day and five days a week: 9:30–11:30 am; 1:00–3:00 pm.).
The Hong Kong Stock Exchange (
http://www.hkex.com.hk/eng/index.htm
) is a separate institution with its own governing rules. (Some of the Trading Rules include the following: (i) Rules of the Exchange; (ii) Disciplinary Procedures; (iii) Operational Trading Procedures; (iv) Rules, Regulations and Procedures of the Futures Exchange, all the others Rules are available at:
http://www.hkex.com.hk/eng/rulesreg/traderules/tradingrules.htm
).
The principal regulator of Hong Kong’s securities and futures markets is the Securities and Futures Commission (SFC), which is an independent statutory body established in 1989 by the Securities and Futures Commission Ordinance (SFCO). The SFCO and nine other securities and futures related ordinances were consolidated into the Securities and Futures Ordinance (SFO), which came into operation on April 1, 2003. The SFC is responsible for administering the laws governing the securities and futures markets in Hong Kong and facilitating and encouraging the development of these markets. The Stock Exchange, a wholly owned subsidiary of HKEx, is a recognized exchange company under the SFO. It operates and maintains a stock market in Hong Kong and is the primary regulator of Stock Exchange Participants with respect to trading matters and of companies listed on the Main Board and Growth Enterprise Market (GEM) of the Stock Exchange. (Besides the Main Board equity market and the derivatives market trading index futures and index options, there is an alternative stock market called GEM, which stands for Growth Enterprise Market. GEM operates on the philosophy of “buyers beware” and “let the market decide” and it has looser rules on listing than that of the main board market). The Futures Exchange, a wholly owned subsidiary of HKEx, is a recognized exchange company under the SFO. It operates and maintains a futures market in Hong Kong and is the primary regulator of Futures Exchange Participants with respect to trading matters. (All products except ETFs (Exchange-Traded Funds are investment funds listed on the Hong Kong Exchanges) are traded between 10:00–12:30 and 14:30–16:00 (Pre-opening Session: 09:30–10:00). ETFs are traded between 10:00–16:00 (Pre-opening Session:09:30–10:00))..
The focuses of the Hong Kong investors in the mainland are largely on H-shares and Hong Kong red chips.
H-Shares are issued by a PRC issuer incorporated under PRC law and listed on the Hong Kong Stock Exchange, the par value of which denominated in Renminbi (CNY), but subscribed for and traded in Hong Kong dollars. The first H-shares company was Tsingtao Brewery Company Limited in June 1993, a producer of the famous Chinese beer. In October 2006, Industrial and Commercial Bank of China (ICBC) set the record for the first company to conduct an IPO and listing on the Shanghai and Hong Kong Stock Exchange simultaneous (A+H dual listing at the same time), making it the world’s largest IPO at that time. However, red chip refers to the company incorporated and listed overseas.
A company is deemed to be red chip (China-controlled company), if (i) the company has at least 30% shareholding held in aggregate directly by mainland China entities, and/or through companies which are controlled by mainland China entities, or (ii) the company has below 30% but 20% or above shareholding held in aggregate directly by mainland China entities, and/or through companies which are controlled by Mainland China entities and, there is a strong influential presence, on a judgmental basis, on the company’s board of directors. Mainland China entities include State-owned organizations and entities controlled by local authorities or private business.
What exposed above is just an overview about the functioning of Chinese Stock Exchanges. In the next entry I will explain in more details about lot size in the different bourses, and permitted gateways.
Cristiano Rizzi
(Some of my entries are extracted from my work titled M&A and Takeovers in China, so if you are interested in this topic, please visit:
http://www.kluwerlaw.com/Catalogue/titleinfo.htm?ProdID=9041140484
).