"H shares" are foreign shares issued by enterprises incorporated in the Mainland, primarily listed in Hong Kong and traded in Hong Kong dollars.

H-share companies listed in Hong Kong have to comply with the additional requirements set out in the SEHK's Listing Rules for both the Main Board and the Growth Enterprise Market (GEM). Among these requirements are that

1. annual accounts have to be in accordance with Hong Kong or international accounting standards;
2. the articles of association must contain provisions which reflect the different nature of domestic shares and foreign shares (including H shares) and the different rights of their respective holders; and
3. investor protection provisions equivalent to those in the laws of Hong Kong must be written into its constitutional documents.

Other than these requirements, the listing process and trading practices for H shares are almost the same as those for other Hong Kong stocks.

The main purpose behind the listing of H-share companies in Hong Kong is fund raising. In order to maintain their competitiveness, most of the H-share companies issued in Hong Kong are of reasonable quality. There are in excess of 50 H-share companies listed in Hong Kong so far. H-share companies that have been approved for the issue of shares will automatically become constituents of the Hang Seng China Enterprise Index. The selection criteria for the constituents of the Hang Seng China Enterprise Index are different from those of the Hang Seng Index and the Hang Seng Red-Chip Index (i.e. the Hang Seng China-Affiliated Corporation Index).

H shares can be classified into sectors, including toll roads, power, coal, raw materials, chemicals, steel, real estate, metallurgy, etc. In terms of concept, H shares can be divided into old brand H shares with heavy debts (early listings) and H shares with better earnings potential. The old brand H-share companies are usually heavily in debt, with low earnings potential; hence, the central government's intention to improve their operating efficiency by reconstruction or consolidation. However, the progress of the reform depends on the decision of the government. Because of this, the old brand H-share companies are always market laggards. However, when there is some positive news in the market, such as a rate cut or business reconstruction, this type of H-share will be heavily speculated.

Investors should note that the latest reform of the B-share market does not open the H-share market to Mainland residents. The B-share market is still totally segregated from the H-share market. State-owned enterprises (SOEs), which have issued B-shares, cannot issue H shares; the opposite also holds. However, SOEs can issue both A-shares and H shares.

Source: SFC Investor Resources Centre