Opinion

George Chen

What happened to B shares?

By George Chen
April 28, 2011

By George Chen
The opinions expressed are the author’s own.

Few people outside of China really know what B shares are.

“B shares? Does that mean they are not as good as A shares?” That’s a typical question I hear from foreign friends when they first come to the mainland market and by chance learn some buzz about the B-share index.

B shares probably only attract public attention when trading gets excitable, as is the case now. The U.S. dollar-denominated B shares index sank more than 7 percent at one point on Thursday after ending down more than  5 percent on Wednesday.

So, what happened?

First, the B shares index tumbled on Wednesday without any clue or warning, surprising most people in the market. On Thursday, it retreated further, even after Beijing attempted to clarify a rumour about capital gains tax that was believed to have triggered the market panic. China was  not likely to start taxing investors on capital gains any time soon, a tax official told Reuters on Thursday.

China first launched the B-share market in the early 1990s, as part of the government’s “opening up” policy, with shares traded in U.S. dollars on the Shanghai stock exchange, and in Hong Kong dollars on the smaller Shenzhen bourse. They were mainly intended for foreign investors, especially those from Hong Kong, neigbouring  Shenzhen.

At the time, investors from outside mainland China were not allowed to buy yuan-denominated A shares, until Beijing launched the Qualified Foreign Institutional Investor scheme (QFII) in 2002 allowing licensed foreign investors to invest in A shares.

Also in the early 2000s, B shares, China’s only equity market fully open to foreigners became marginalised when Beijing stopped new B-share offerings by Chinese companies. In comparison with Shanghai, only few B-share companies are listed in Shenzhen for legacy reasons, with the Shanghai exchange playing the dominant  role.

Since the B-share market became marginalised, market speculation has been prevalent.  A merger with the much larger  A-share market is widely anticipated and, in the view of many investors, should benefit B shares, partly because of the appreciation of the yuan, in which A shares are traded.

Recent media reports suggest a number of large multinational corporations, for example, HSBC (born in Hong Kong and Shanghai, not London), have been selected for a yuan-denominated share issuances on the Shanghai stock exchange, where a brand new “international board” will be set up for such foreign IPOs.

This is exciting news and exactly what Shanghai officials want to fulfill the city’s ambition of becoming a leading financial centre, as it was in the golden era of the 1930s.

The prospect of an international board makes the B-share market seem even more boring, lowering expectations for the merger of B-share and A-share markets. Investors say B shares are not a priority for the Chinese securities regulator on and all  Beijing wants is probably to offer a plan to close the B-share market as painlessly as possible.

In other words, as Chinese leaders often like to say, the historical mission (for B shares in this case) has been achieved.

One institutional investor told me, “Now we feel it (B shares) are just like the Titanic – a sinking ship. It may not sink if the government wants to save it, but nobody wants to risk waiting to see what happens next.”

An even sadder truth is that today’s B-share market has more domestic investors than foreign. As domestic institutional investors are not allowed to trade B shares, the main direction of trade comes from domestic individual investors. Many foreign investors, in particular some early birds to the unique B shares market have already shifted their focus elsewhere, for example, preparing to buy HSBC’s new shares in Shanghai soon.

Those who quit B shares early may be the real winners. The unexpected B-share tumble this week came after big gains over the past one or two years, especially among real estate companies, which were believed to be a good bet on the appreciation of the yuan.

As the old Chinese saying goes: “Even the finest feast must end at last.” When the feast is over, who will be the last to sing?

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: A man reads information on an electronic screen at a brokerage house in Shanghai August 17, 2009. REUTERS/Aly Song

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