CHINA'S SECURITIES EXPERIMENT: THE CHALLENGE OF GLOBALIZATION
(Jiangyu Wang)

II. Legal Framework Under National Laws

D. "Chinese Classification" of Stocks

Even though both the Corporation Law and Securities Law is curiously silent on the classification of corporate stock, it remains the most distinctive feature of Chinese securities markets: the stock, in addition to its universal classification as common stock, preferred stock, etc, also is defined by the status and nationality of the shareholders. Roughly, there is four types of shares: State shares, Legal person shares, individual shares, and foreign capital shares. The basic rational under the classification is to control the transferability of different types of shares: State shares and legal person shares are theoretically nontransferable, foreign shares may only be traded in a special, closed market, and individual shares may be transferred only between Chinese citizens.

State Shares (Guo Jia Gu) State shares refers to shares held by governmental agencies or authorized institutions on behalf of the State. According to relevant regulations, it shall include: (1) The shares converted from the net assets of SOEs which have been transformed into joint stack companies. (2) Shares initially issued by companies and purchased by the governmental departments investing on behalf of the State. (3) Shares initially issued by companies and purchased by the investment companies, assets management companies, and economic entity companies authorized to make investment on behalf of the State. State shares are not allowed to be traded on an open market.

Legal Person Shares (Fa Ren Gu) Legal person shares refer to shares of a joint stock company owned by another company or institution with a legal person status. The legal person shares can be indirectly hold by the State if the shareholders are State-owned companies. Basically, there are four types of owners for legal personal shares, namely, state-owned legal person shares, collective enterprise legal person shares, private enterprise legal person shares, foreign invested enterprise legal person shares, and institutional legal person shares. The transfer and trading of legal person shares are also restricted.

Individual Shares or A Shares(Ge Ren Gu) Individual shares, with an official recognized nick name of "A shares", refer to shares that may only be owned by Chinese citizens. A shares has the full function born by classic stock, and it can be freely traded and transferred in domestic markets.

Foreign Capital Shares (Wai Zi Gu) Foreign capital shares include B shares and overseas listing shares. B shares are shares which are offered exclusively to foreign investors. Like other shares, they are denominated in RMB, but Chinese citizens are not permitted to own or trade in B Shares. Issuing B shares is another channel for Chinese companies to raise foreign capitals. Overseas listing shares are shares issued by Chinese companies listed on securities markets outside mainland China. Among which are H shares, N shares and L shares:

H shares are offered by Chinese companies listed on Hong Kong Stock Exchange. They are subscribed for and traded in Hong Kong Dollars, and denominated in RMB. They can only be purchased and traded by Hong Kong local investors or overseas investors.

N shares are issued to foreign investors on US stock exchanges. They are denominated in RMB and subscribed for in US dollar. Dividends are declared in RMB but paid in US dollars. In fact, N shares are not traded directly on stock exchanges but are issued by way of ADRs (American Depository Receipts).
L shares are issued on London Stock Exchange according a memorandum of understanding signed between U.K and China's relevant authorities on October 7, 1996.

(Footnote Omitted)