The Shanghai Stock Exchange, the fifth largest in the world, has not performed very well in the past couple of years. This is partly caused by the government where they call the shots on which companies can list their shares.

To help establish the market again, a program called Shanghai-Hong Kong Stock Connect will pave the way for all Hong Kong and overseas investors and allow them to trade eligible shares in Shanghai. China will now allow foreign investors to buy around 500 stocks in the Shanghai Stock Exchange through Hong Kong brokerage accounts, subject to an annual total quota of $48 billion.

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Stocks that trade in Shanghai are known as A shares and stocks that trade in Hong Kong are known as H shares. Previously, only through a quota system were the foreigners able to participate in the Shanghai bourse. So this is not the first time foreign investors are able to buy Chinese stocks, but the new program will let investors buy A-shares directly.

Now flaws are inevitable and there is a catch to this new program. There are still loopholes and buying stocks will be tedious for a typical U.S. investor. One can only purchase shares in Shanghai by first going through a broker in Hong Kong who then must go through the Hong Kong Stock Exchange, which is linked to the Shanghai Exchange. So buying stocks online is not going to be an easy task.

Even though the economy of China has increased over the past 20 years, the Shanghai Composite has been flat over that time span. Chinese management teams tend to be a lot younger, which means they are not as experienced as the tenured financial experts in the United States.

Nevertheless, this new program appears to be promising and very attractive for those who want to participate in the Chinese bourse. 

TagsShanghai Stock Exchange, Hong Kong Stock Exchange, Shanghai-Hong Kong Stock Connect, foreign investors, China stock market