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China B Shares Officially Opened To Domestic Investors.
In a further move to reform stock market trading in China, domestic investors will officially be allowed to own B shares, a group of stocks previously reserved for foreign investors. Trading in B shares was halted prior to the announcement, which was made by the China Securities Regulatory Committee (CSRC) on February 19, and was scheduled to resume on February 28 to give the Shanghai and Shenzhen Stock Exchanges time to prepare.
Current Status and History of B Shares
Altogether, a total of 113 B shares valued at US$6.3 billion trade on the Shanghai and Shenzhen Stock Exchanges. By comparison, there are approximately 1,000 A shares with a market capitalization of US$500 billion, and China’s five largest companies (China Mobile, China Unicom, Legend, PetroChina, SinoPec - listed on Hong Kong and New York Stock Exchanges) with a market cap of US$132 billion.
The price/earnings multiples of B shares, based on 1999, range between –486 and 2925. In that year, twenty-three B share companies sustained losses. Although B share prices have an average 74% discount to A share prices, it is worth noting that A shares have P/E multiples that average above 60.
Foreign investors began to lose interest in B shares when China started to list Chinese companies on overseas exchanges. The Asian Financial Crisis accelerated the process, and the massive liquidation that followed sent B share indices to their historic lows, down to 22 for Shanghai B shares and 45 for Shenzhen B shares. This represented a drop of 85% from their peaks.
As foreign investors abandoned B shares, Chinese investors (with the tacit approval of the authorities) increasingly took their place, and now, at least 70% of B share trading volume is done by Chinese.
Can Foreign Investors Benefit?
Anybody who owns B shares now will benefit immediately from this event, as prices were expected to move up sharply. For foreign investors in Chinese stocks who do not own B shares, the benefits will come later as market reform continues.
As B shares resumed trading, they were expected to move up their daily 10% price limit on very thin volume for a period of time. Whether new investors could participate in the gains depended on whether they could purchase B shares before the gap between A and B shares narrowed too much.
The best B share performers have been loss-making companies who attracted investors with so-called restructuring plans. However, they lost their shine recently after the government promised to crack down on stock price manipulation and de-list poorly-performing companies as part of its reform plan. There are very few good-quality B shares, as a matter of fact, and these are the only stocks that are likely to have big gains in the process to close the gap with A shares on any permanent basis.
Positive Implications for Market Reform
Long-term, foreign investors will benefit from the opening up of B shares because it is another important milestone on the way to creating a single, liquid securities market for Chinese stocks. At the beginning, by officially allowing domestic investors to trade in B shares, the B market may become active again, and in turn this could encourage high-quality companies to issue B shares. Then a major step could follow with the elimination of B shares in favor of a single class of shares in time for the installation of a Qualified Foreign Institutional Investor (QFII) system, as required by China’s pending membership in the World Trade Organization (WTO); this could happen as early as the end of 2002.
For now, it is still too early to forecast with certainty how the B share situation will evolve, and what further steps by the CSRC may be necessary. However, it is very clear that China is determined to continue on its course of reform and unification of its capital markets for the benefit of the country’s economic development, as well as investors, both domestic and foreign.
