All the Tea’s in China: Buying Stock on the Shanghai, Hong Kong, and Shenzhen Exchanges

With the upcoming legalization of Taiwanese investment in the major Chinese stock exchanges, along with the projected 2012 market rally after last year’s slowdown, many investors are asking themselves whether now is the time to invest in China’s future.

Given China’s history of isolationism some may be understandably nervous about forming close economic ties with the People’s Republic, and its tight market control policies and regulations make it a relatively tightly-wound economic environment.

Stocks in China’s mainland markets are separated into two categories, Class A stocks and Class B stocks. A typical Class A stock represents the best of China’s market indices, but Class B stocks are often risky or outright dead fish.

Foreigners, by virtue of the People’s Republic’s heavy internal-external regulations and powerful economic policy committees, are allowed to trade only in Class B stocks on the Shanghai Exchange. Opening a trading account with a major U.S. brokerage like Merrill Lynch, or another brokerage that deals with the Chinese markets, will allow access to Class B stocks, but risk is high and rewards few and far between.

A temporary residence visa, at minimum, for the regions of Hong Kong or Macau, will allow trading access to the Hong Kong stock exchange. Your first move as a potential investor should be to secure a visa.

The Hong Kong stock exchange does not operate under the same regulations as mainland trade, and prospective investors aren’t forced to deal in dangerous B stocks. Many brokerage firms do business with the Hong Kong Exchange, and finding one that suits your needs is a necessary step toward getting settled in the market.

There are a variety of additional hoops you’ll be required to jump through, like Debit Authorization and Joint or Individual Investor Form processing, but with good performers like Baidu, Trina Solar, Suntech Power, and Sina Corp all showing strong trends toward profitability with quarterly increases edging into the high single digits, it’s no wonder that investors are eager.

With United States and People’s Republic finance more intertwined than ever, investment opportunities are burgeoning. The right strategy can take advantage of the significant 2012 rally displayed by the Hong Kong market especially, which posted Friday gains of 0.9 percent as part of an overall trend of rising prices and stronger profits.

With the tenth largest securities market in the world, second in Asia following only Tokyo, Hong Kong is a burgeoning center of market growth in the Asian sphere.

Hong Kong’s liquidity makes it central to China’s state reforms and future plans for infrastructure development and expansion. With the market so dear to the state one can expect a certain degree of stability, and while it’s not a guarantee it’s certainly superior to the alternative: a deregulated market racing for short-term profitability.

In conjunction with Taiwan’s entry into the major Chinese exchanges, including the Hong Kong exchange, economic reforms and Mainland China’s inclusion in the exchange have greatly increased the pace of Hong Kong’s growth. If you take the time to secure a visa and to establish a relationship with a brokerage firm that does business in Hong Kong, the potential rewards are high while risks remain decidedly acceptable.

In short, a solid vote for Hong Kong, but consensus seems to indicate that China’s mainland exchanges are still ambivalent toward serious Western involvement. The Shanghai and Shenzhen Exchanges may come around, but for now capital bound China-ward belongs where it can be most safely and profitably distributed: in Hong Kong.

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