For those of us living in Singapore, investing in China stocks can sometimes seem to be an intimidating prospect.
However, the Hong Kong stock market offers an opportunity for us to access some of China’s largest companies.
While Hong Kong’s place as a global financial centre is similar to Singapore in many ways, its stock market functions in a different manner given the size and breadth of companies listed there.
Known for many years as the “Gateway to China”, Hong Kong’s stock market is the perfect example of that tag.
Many Chinese companies are listed on the Hong Kong Stock Exchange as the city provides the perfect place for firms to raise global capital outside of Mainland China.
Ever since starting to list in the early 2000s, Chinese stocks in Hong Kong have varying characteristics. So, here’s a short investment guide to the wide array of China stocks listed in Hong Kong.
Types Of Shares In Hong Kong
Going back in history, many Chinese companies that listed their shares in Hong Kong in the early- to mid-2000s were large state-owned companies.
Over the years, many of these companies are either listed in both Shanghai/Shenzhen and Hong Kong, or just one of those markets.
That determines what their shares are classified as to both international investors and Mainland China investors.
H-Shares
Many Chinese companies originally had a stock market listing in China (known officially as an “A-share”). Meanwhile, if they are also listed in Hong Kong then their shares became known as “H-shares”.
That still applies today. Many of the biggest state-owned enterprise (SOE) stocks – such as energy giants like PetroChina Co Ltd (SEHK: 857) or the country’s largest bank Industrial & Commercial Bank of China (SEHK: 1398), also known as ICBC – are H-shares.
However, H-share companies are not just confined to SOEs. On the private sector side, insurance giant Ping An Insurance Group Co of China (SEHK: 2318) is a good example of an H-share company.
Essentially, this “H-share” title means they are incorporated as companies in Mainland China and listed in Hong Kong.
P-Chips
The term “P-chips” is used to describe non-state-owned Chinese companies listed on the Hong Kong Stock Exchange but incorporated outside of Mainland China.
The “p” stands for “private” as these companies originate from China’s private sector.
Many tend to be incorporated in the Cayman Islands or British Virgin Islands. For most of us, these are the most recognisable Chinese companies listed in Hong Kong as many of them are in the technology sector.
Examples of prominent P-chip stocks include the likes of Tencent Holdings Ltd (SEHK: 700), Alibaba Group Holdings Ltd (SEHK: 9988) and Meituan Dianping (SEHK: 3690).
All these P-chip companies have one thing in common; none of them have a listing on a Mainland Chinese stock exchange, such as Shanghai or Shenzhen.
To be classified as a P-chip, they must be listed in Hong Kong (but can have additional listings in other overseas stock exchanges).
Red Chips
As the name suggests, “red chips” are actually the same as P-chips (in that they’re incorporated outside of Mainland China but listed in Hong Kong).
The key difference is that red chips are usually controlled by the Chinese state or government, essentially meaning they’re SOEs.
The world’s largest mobile telecoms firm by customer count – China Mobile Ltd (SEHK: 941) – is a prominent red chip stock. The company was actually incorporated in Hong Kong in 1997.
Its Shanghai listing earlier this year makes it one of the few red chips with a Mainland Chinese stock market listing.
Dividend Tax Implications
In Singapore, we’re used to having a zero dividend withholding tax on all the dividends paid out by companies listed here. Similarly, in Hong Kong, there’s also a zero dividend withholding tax on dividends.
While this applies to most of the companies listed in Hong Kong, there are important exceptions that investors should take note of.
Perhaps the biggest is when it comes to investing in H-shares. That’s because H-share companies are subject to a dividend withholding tax of 10% – imposed by China’s State Administration of Taxation – on gross payouts to investors.
That means Singapore investors who, for example, own shares of Ping An Insurance, will only receive 90% of the dividend per share (DPS) announced.
Meanwhile, owners of P-chips and red chips will receive their full dividends as long as they’re individual investors who are not buying the Hong Kong shares through the Stock Connect programme.
Essentially, if you’re not a resident or citizen of Mainland China then you should receive your full dividend from P-chips and red chips in Hong Kong.
Understanding The Differences As A Foreign Investor Investing In Hong Kong
For investors thinking about buying shares of Chinese companies directly in Hong Kong, it’s important to know the differences between them to avoid any surprises.
Generally, red chip companies and SEOs are widely-recognised as being less efficient capital allocators and more staid than their private counterparts given they are state-controlled.
However, many H-shares pay generous dividends so for investors looking at potential income streams in Hong Kong, it’s also crucial to know the tax implications.
Overall, there’s a diverse range of Chinese stocks listed in Hong Kong which can provide investors with a wide opportunity set to gain exposure to the world’s second-largest economy.
Read Also: Dogs Of Hang Seng: Investing In The Top 10 Dividend Yielding Constituent Stocks
Advertiser Message
Invest and trade Chinese stocks and ETFs today through Interactive Brokers (IBKR) , a pioneer in global online trading with over 40 years of track record. Best known for its low commission fees, transparent rates and innovative brokerage services, IBKR provide investors with access to over 150 markets in 33 countries. Open an account with IBKR today.
