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.