ADRs vs. H-shares

What are ADRs?

American Depositary Receipts (ADRs) allow investors to own shares in foreign companies without trading directly on those companies’ home stock exchanges. To create an ADR, a U.S. financial institution—usually a large commercial bank—purchases the actual shares of the foreign company (for example, Alibaba shares listed in Hong Kong). The bank then issues receipts, known as ADRs, representing these underlying shares.

These ADRs trade on U.S. stock exchanges such as the NYSE or Nasdaq, priced and transacted entirely in U.S. dollars, just like domestic American stocks. Each ADR corresponds to a specific number of foreign shares, which varies depending on the company. For instance, one ADR might represent two shares of Alibaba traded overseas, while another ADR might represent ten shares of a different foreign firm.

This structure simplifies investing in international companies by eliminating the need for investors to handle foreign currency exchange, directly navigate overseas regulatory requirements, or trade on foreign stock exchanges. Instead, all these complexities are managed by the issuing bank, enabling investors to focus solely on choosing their investments.

What are H-shares?

H-shares represent ownership in mainland Chinese companies but are traded directly on the Hong Kong Stock Exchange (HKEX). Companies such as PetroChina and China Mobile are examples of firms incorporated in mainland China, regulated by Chinese authorities, but listed in Hong Kong specifically to attract international investment.

Unlike ADRs, which trade in U.S. dollars on American exchanges, H-shares are priced, traded, and settled directly in Hong Kong dollars. Investors typically purchase H-shares through brokers offering international market access. The “H” stands for “Hong Kong,” indicating that these shares bypass mainland China’s restrictive foreign investment regulations, allowing easier entry for overseas investors.

For investors new to international trading, H-shares provide direct exposure to China’s economy but require familiarity with currency conversion and HKEX-specific trading procedures and rules.

Key similarities between ADRs and H-shares

ADRs and H-shares both enable investment in global markets, but their similarities extend beyond international accessibility. Below are two critical similarities that directly impact your portfolio decisions.

Exposure to restricted markets with fewer barriers

Both ADRs and H-shares provide access to companies operating in markets with strict foreign ownership rules, notably mainland China. Firms like Alibaba or ICBC exemplify businesses that would otherwise be challenging to access directly due to China’s tight restrictions on foreign investment in its domestic A-share market.

ADRs, through U.S. banks, and H-shares, via Hong Kong listings, effectively bypass these barriers. This allows investors to participate in China’s economic growth without navigating the complex regulatory environment or the need to open a mainland brokerage account.

Consequently, these instruments reduce friction and simplify the process, enabling you to capitalize on opportunities in restrictive markets.

Simplified currency handling

Both ADRs and H-shares streamline currency management for international investing. ADRs trade directly in U.S. dollars on American exchanges, with the issuing banks managing currency conversion from the underlying shares denominated in foreign currencies like Chinese yuan.

Similarly, H-shares are traded in Hong Kong dollars, separate from the Chinese yuan, insulating investors from China’s domestic currency restrictions. Additionally, since the Hong Kong dollar is pegged to the U.S. dollar, currency fluctuations remain relatively predictable, mitigating the risks typically associated with foreign exchange.

This simplification allows investors to concentrate on evaluating corporate performance rather than worrying about currency volatility.

Key differences between ADRs and H-shares

Although ADRs and H-shares both offer investors opportunities to access foreign stocks, understanding their key differences can significantly affect your investment decisions. Below are five essential distinctions investors should consider carefully:

Trading venue and ownership structure

ADRs represent an indirect form of ownership: a U.S. bank holds the underlying shares of a foreign company (such as Alibaba), and investors trade certificates linked to these shares on American exchanges (NYSE or Nasdaq). You don’t own the actual shares directly but rather the ADR certificates, traded in U.S. dollars under U.S. regulatory frameworks.

In contrast, H-shares are actual shares of mainland Chinese companies listed and traded directly on the Hong Kong Stock Exchange (HKEX). Investors who purchase H-shares directly own the company’s stock and must navigate HKEX trading hours, rules, and market conditions.

Availability across markets

Not all Chinese companies provide both ADR and H-share options, limiting investor choices. While prominent firms like Alibaba offer both ADRs and H-shares, many others—particularly state-owned enterprises such as China National Offshore Oil Corporation (CNOOC)—are exclusively available as H-shares.

Thus, your investment strategy may be shaped by the availability of shares across these two channels. If a company isn’t available as an ADR, investors must either participate directly through HKEX or exclude it from their portfolio entirely.

Minimum purchase requirements

The barrier to entry differs significantly between ADRs and H-shares. ADRs typically have no minimum investment beyond one share, and flexible ADR ratios (e.g., one ADR representing two underlying shares) often reduce the individual share price, making them accessible to smaller investors.

Conversely, H-shares adhere to HKEX trading standards, generally requiring purchases in minimum lot sizes (often ranging from 100 shares per lot). This structure results in higher entry costs and potentially limits smaller or incremental investments compared to ADRs. For example, purchasing H-shares of larger companies may involve significant initial capital outlay, influencing investors with smaller budgets.

Trading hours and calendars

Trading hours differ significantly due to geographical locations. ADRs follow standard U.S. market hours (9:30 AM to 4:00 PM Eastern Time) and observe U.S. holidays, such as Thanksgiving or Independence Day.

H-shares trade according to Hong Kong Stock Exchange (HKEX) hours: typically 9:30 AM–12:00 PM and 1:00 PM–4:00 PM Hong Kong time. Investors trading H-shares must account for time-zone differences and Hong Kong holidays, potentially complicating short-term trading. However, for long-term investors, these timing issues are manageable through the use of pre-set orders.

Cost considerations

The cost structures of ADRs and H-shares have notable differences, which can affect your net returns depending on how you trade and hold your investments.

ADRs come with depositary fees, typically $0.01–$0.03 per share annually, which are payable to the issuing bank. These fees may be embedded in the share price or deducted through brokers. Additionally, dividends from Chinese ADRs are subject to a 10% withholding tax imposed by Chinese tax authorities before distribution, meaning investors receive their dividends net of this amount.

H-shares, in contrast, do not incur depositary fees, but investors must account for trading fees levied by HKEX (approximately 0.005%–0.1% per transaction) as well as currency conversion costs when exchanging their local currency into Hong Kong dollars. Like ADRs, H-share dividends are also subject to the same 10% withholding tax under Mainland Chinese tax regulations.

While ADRs may have small ongoing depositary fees, H-shares involve one-time trading and currency conversion costs. The most cost-effective choice depends on your broker’s fee structure and your trading frequency.

Frequently asked questions

Can I trade both ADRs and H-shares in my U.S. brokerage account?

Yes, you can trade both ADRs and H-shares, but the ease of doing so depends on your brokerage.

ADRs are straightforward since they trade on U.S. exchanges like the NYSE and Nasdaq. Virtually all U.S. brokerage platforms support them.

H-shares require a broker that provides international access to the Hong Kong Stock Exchange (HKEX). Platforms such as Interactive Brokers or Fidelity’s global trading service commonly offer this capability, but you may need to enable HKEX trading or open a dedicated international trading account.

Are ADRs riskier than H-shares, or vice versa?

Neither ADRs nor H-shares are inherently riskier than the other, but each has unique considerations:

ADRs involve minor risks, such as reliance on a U.S. depositary bank as a middleman. While bank failures are rare, this extra layer adds some complexity. Additionally, currency conversions are handled within the ADR structure, which could introduce small inefficiencies.

H-shares expose investors directly to Hong Kong’s market dynamics, including HKEX-specific volatility and fluctuations in the Hong Kong dollar (which is pegged to the USD but can still experience slight variations).

Both ADRs and H-shares share common risks related to the company, industry, and Chinese regulatory environment. ADRs may feel safer due to U.S. regulatory oversight, whereas H-shares provide more direct and transparent market exposure without an intermediary.

Why would a company only offer H-shares and not ADRs?

Companies may choose to offer only H-shares and not ADRs primarily due to cost considerations and regulatory complexities:

Listing as an ADR involves extensive U.S. Securities and Exchange Commission (SEC) disclosure requirements, higher compliance fees, and additional administrative overhead. Some Chinese firms—especially state-owned enterprises like China National Offshore Oil Corporation (CNOOC)—may find the costs outweigh the potential benefits, particularly if they anticipate limited U.S. investor demand.

On the other hand, H-shares are typically simpler and more cost-effective, with Hong Kong’s regulatory framework being both robust and comparatively more flexible. The geographic proximity of Hong Kong to mainland China also makes HKEX listings a natural fit for attracting both Asian and international investors without the extra costs and complexity associated with ADRs.

How do taxes work if I’m a U.S. investor holding ADRs and H-shares?

When holding ADRs, investors are subject to U.S. capital gains taxes—ranging from 0% to 20% for long-term gains and 10% to 37% for short-term gains. Additionally, dividends received from ADRs are subject to a 10% withholding tax imposed by China. However, U.S. investors can typically claim this withholding as a foreign tax credit by filing IRS Form 1116, helping to offset their overall U.S. tax liability.

For H-shares, Hong Kong does not impose capital gains taxes, but China still withholds 10% on dividends before distribution. While capital gains from selling H-shares are not taxed in Hong Kong, they must still be reported as foreign income to the IRS and are taxed according to standard U.S. capital gains rules. Like ADRs, the 10% withholding tax on H-share dividends may also qualify for a foreign tax credit, depending on the investor’s tax situation.

While both ADRs and H-shares have similar tax implications on dividends, H-shares require additional foreign income reporting, particularly for capital gains. To ensure compliance and optimize tax efficiency, consulting a tax professional is highly recommended.

Which is cheaper to trade in the long run—ADRs or H-shares?

The cost-effectiveness of ADRs versus H-shares largely depends on how frequently you trade and the fee structure of your brokerage.

For investors who trade frequently, ADRs are often the more economical choice. U.S. brokerage commissions are typically low, and while ADRs come with depositary fees—usually ranging from $0.01 to $0.03 per share annually—these fees are relatively minor compared to the potential costs of foreign exchange. Since ADRs trade directly on U.S. exchanges in USD, investors avoid the additional expenses associated with converting currency, making them a more convenient and cost-effective option for those who actively buy and sell.

On the other hand, for long-term investors, H-shares can be more cost-efficient due to the absence of depositary fees. Although HKEX trading fees (typically 0.005% to 0.1% per transaction) and currency conversion costs apply when buying or selling, these are one-time expenses rather than ongoing charges. As a result, H-shares may be the better choice for those who intend to hold their investments for an extended period rather than trade frequently.

Which is better for small investors starting out—ADRs or H-shares?

ADRs are generally better suited for small investors or beginners in international investing.

• They allow purchasing even a single share, without minimum lot requirements. In contrast, H-shares often require minimum lot sizes (commonly 100 shares), leading to higher upfront investment costs. For example, buying 100 H-shares at $50 HKD (~$6.40 USD per share) would require around $640 USD. In comparison, ADRs allow gradual position building, making them a more accessible entry point for new investors.
• They trade in U.S. dollars on familiar U.S. exchanges, eliminating currency conversion complexities.

Investors can expand into H-shares later as they gain experience and capital.