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Several investment vehicles are available to foreign portfolio investors wanting to gain exposure to China. There are both closed-end and open-end mutual funds that invest primarily in the equity of companies whose principal business is based in China or the greater China region. These funds can be purchased either on the stock exchange or from mutual fund companies. Currently, many investors are pouring money into China private equity or venture capital funds. These funds typically make investments in companies in China that have not yet listed their shares on any exchange. Although this is potentially a high return possibility, investors should be aware of some degree of illiquidity and lack of transparency. Other than those funds, investors may consider purchasing stocks of Chinese companies in Chinese domestic market (A shares and B shares) or outside in Hong Kong, London, or New York.

A unique feature of China's stock markets is that companies may issue A shares and B shares. A shares are primarily for Chinese residents and are denominated in ren-minbi (RMB). B shares were exclusively for foreign investors, but in February 2001, the People's Republic of China (PRC) government allowed Chinese residents to purchase B shares. B shares are not convertible to A shares, but both types of shares give their owners the same rights with one exception: dividends for B shares are in foreign currencies. The result is a segmented market in which A shares are much more numerous: more than 1,000 companies have issued A shares (1,310 as of February 2007), but only a little over 100 have issued B shares (109 as of February 2007). The total number of A and B shares listed has increased from 53 in 1992 to 1,419 by early 2007.

The special characteristics of B shares are:

• B shares are denominated in RMB, but are traded in foreign currency (in U.S. dollars in the Shanghai bourse and Hong Kong dollars in Shenzhen).

• Dividends and other payments are calculated and declared in RMB, but paid in foreign currency.

• B shares were only issued to foreign investors before 2001. After 2001, domestic individual investors could open B shares accounts and trade B shares.

• Dividends and capital gains from B shares can be sent abroad despite China's strict foreign exchange control.

• B shares provide foreign investors with access to China's equity market.

• B shares are traded on both exchanges.

• Before entering the WTO, foreign brokerage firms were only able to trade B shares through local brokers. In recent years, qualified foreign institutional investors are able to trade A shares.

In addition to B share transactions, foreign investors can participate in China's stock markets through several other alternatives, including shares listed in Hong Kong (H shares), New York (N shares), and London (L shares). H shares are listed on the Hong Kong exchange to tap offshore financing. They are traded in Hong Kong dollars and can only be traded by Hong Kong residents or overseas investors. In Hong Kong, there are also Red Chip stocks, which are issued by Hong Kong companies that either are controlled by Chinese corporations or derive considerable revenues from operations in China. N shares are listed in New York in the form of American Depositary Receipts (ADRs). Dividends are declared in RMB but paid in U.S. dollars. L shares are listed in London in accordance with a memorandum of understanding signed between the United Kingdom and China in 1996. As of February 2007, 86 companies have issued both A and B shares while 34 companies floated A and H shares.

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