H-share circulation and HK market reforms

China Securities Depository and Clearing Corporation and the Shenzhen Stock Exchange jointly issued the Detailed Rules for the Implementation of the Pilot Business of Full Circulation of H Shares (Trial Implementation) on 20 April. The implementation rules regulate the registration, depository, transaction and settlement of H-share full circulation, the implementation of which shows that the H-share full circulation pilot system is on track and of great significance.

In 1993, the Hong Kong Stock Exchange amended the Hong Kong Stock Exchange Listing Rules to allow state-owned enterprises (SOEs) to be listed on Hong Kong Stock Exchange and issue H-shares. According to these listing rules, H-shares refer to overseas listed foreign shares listed on the Hong Kong Stock Exchange. On 4 August 1994, the State Council promulgated the Special Rules concerning Floating and Listing of Shares Overseas by Companies Limited by Shares, which stipulate that shares of companies limited by shares that are raised from overseas investors and listed on overseas stock exchange are overseas listed foreign shares. If such shares are listed on the Hong Kong Stock Exchange, they are H-shares.

Under the current listing structure, H-shares issued after listing in Hong Kong can be freely circulated. Shares that come from investment in such companies by foreign capital before listing (unlisted foreign shares) can be converted to H-shares upon application and approval, and then can be circulated. Foreign shares denominated in renminbi and subscribed in currencies other than renminbi (i.e., B-shares) may also be converted to H-shares. Except for those situations, shares held by other domestic shareholders are all recognized as “domestic shares” and can only be transferred through agreements between Chinese legal entities, natural persons, qualified foreign institutional investors, and strategic investors, and cannot be circulated and cashed out on the Hong Kong stock market.

Fan Xingcheng is a senior partner at Dentons