A-shares are shares of Chinese companies incorporated in mainland China that are traded in RMB either on the Shanghai Stock Exchange or the Shenzhen Stock Exchange (see more about Chinese share classes here).
There are three ways for foreigners to invest in A-shares:
Qualified Foreign Institutional Investor (QFII) program
Renminbi Qualified Foreign Institutional Investor (RQFII) program
Stock Connect Program
We go through these in this article.
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Qualified Foreign Institutional Investor (QFII) Program
QFII was launched in 2003 as a pilot program to allow qualified institutional investors to invest directly in China's main stock markets.
Initially, joining the program involved going through a lengthy approval process. A quota was also implemented to limit the total amount that foreign institutions could invest in through the QFII program. However, over time the requirements for entry to the program were lowered for insurance companies and asset managers. Charity funds, pension funds, endowment funds, sovereign funds, and trusts were also allowed to join the program. The overall investment quota for the program and quotas granted to each member investor were also gradually increased.
In 2019, the quota system was ceased and qualified institutions had an unlimited quota to invest in Chinese stock markets. However, QFII only targets investors that want to benefit from stock price changes and the program cannot be used as a channel to take control of a Chinese company. Consequently, QFII caps the maximum percentage of a company that a qualified foreign institution can at 10%.
Although qualified investors could only invest in the stock markets at first, the approved list of asset classes expanded to include a wide range of exchange-traded products, including exchange-traded bonds, some CIBM-traded bonds, bond repurchases, options, certificates of deposit, and financial and commodity futures. As of 2019, member institutions could also invest in privately offered funds such as hedge funds, as long as those funds invest in the approved list of asset classes and products.
Renminbi Qualified Foreign Institutional Investor (RQFII) Program
The RQFII program was launched in 2011 and is equivalent to the QFII program discussed above, with the exception of currency. In the QFII program, foreign investors exchange their money, denominated in non-RMB currency, into RMB via an onshore exchange, and then invest. In the RQFII program, foreign investors invest directly using existing RMB they already have. In this case, offshore investors need to open a bank account in Hong Kong with an approved Chinese bank, where they can deposit RMB directly into the account and use this money to invest in China.
The rule with regards to approval and quotas, the time it takes for approval, the allowed list of asset classes, and etc. are identical for QFII and RQFII, and there is no advantage or disadvantage to choosing one over the other with regards to gaining access to equity (or other approved asset classes) investment in China.
Stock Connect
Stock Connect allows foreign institutional and individual investors to invest in A-shares through either of two platforms: (1) the Shanghai-Hong Kong Stock Connect - founded in 2014, or (2) the Shenzhen-Hong Kong Stock Connect - founded in 2016. The choice of platform depends on the investor's interest: investors who are interested in investing in Chinese stocks listed on the Shanghai Stock Exchange would opt for the Shanghai-Hong Kong Stock Connect, while investors who are interested in investing in Chinese stocks listed on the Shenzhen Stock Exchange would choose the Shenzhen-Hong Kong Stock Connect.
To participate on either Stock Connect, investors need to open an account with a broker in Hong Kong, with a minimum required deposit of RMB500,000. Unlike QFII and RQFII, only broker approval is needed and approval from the Chinese regulators is not required.
In addition to foreign (i.e. non-Chinese) investors, Hong Kong investors can also buy Chinese stocks via Stock Connect, while mainland Chinese investors can buy Hong Kong stocks through the same platform as well.
More than 2,000 stocks are available for purchase via Stock Connect, with the majority consisting of mainland Chinese stocks and only around 320 Hong Kong stocks. The Shanghai-Hong Kong Stock Connect has a daily quota for the total volume of stock purchases, but no specific quotas for each investor. The Shenzhen-Hong Kong Stock Connect does not have any quota limitations.
Note: there is also a Shanghai-London Stock Connect which was launched in 2019. However, the scope of investment is very limited with only four Chinese companies available for LSE investors to invest in. Due to political tensions between China and the UK surrounding the situation of the Hong Kong protests, further expansion and development of the Shanghai-London Stock Connect was effectively put to a halt in early 2020. Further information can be found here.
Which One Should I Pick?
If you're an individual investor...
You have to go through Stock Connect.
If you're an institutional investor...
If the stocks you are interested in is available on Stock Connect, this is the easier way to go since only broker approval is needed and you won't need to go through a more complicated regulatory approval process.
However, QFII and RQFII gives you access to more asset classes (e.g. options, futures, bond repurchases) as well as a much wider selection of stocks, including IPOs and secondary offerings.
Additional Information
Investing in China (Equities)
Investing in China (Bonds):
The Future of Chinese Economic and Financial Policies:
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