To B or not to B? A question of reform

PUBLISHED : Monday, 06 August, 2012, 12:00am
UPDATED : Wednesday, 15 August, 2012, 11:05pm


Speculation that Beijing will drastically overhaul the nation's slumbering hard-currency B-share market has reached fever pitch as the plummeting price of one of the companies on the board sends the firm to the brink of delisting.

Fujian-based electronics manufacturer Tsann Kuen (China) Enterprise has become a lightning rod for B-share investor anger because it is in line to become the first mainland-listed firm to fall victim to a revised delisting rule.

The China Securities Regulatory Commission (CSRC) tightened the listing rules for the B-share markets in Shanghai and Shenzhen earlier this year, announcing that companies whose share prices trade below one yuan for 20 consecutive days would be delisted.

As of Wednesday last week, Tsann Kuen's B shares had traded below the equivalent of one yuan for 18 straight sessions before the company announced it would pursue a bailout plan, without elaborating.

Analysts warn that if Tsann Kuen were delisted, it could open the floodgates for more expulsions.

Tsann Kuen had enjoyed a record of sustained profits but its shares became locked in a death spiral after the company warned investors first-half losses would range from 18 million to 23 million yuan (HK$28.2 million).

The new delisting mechanism, which is designed to expel perennial loss-makers, resulted from CSRC chairman Guo Shuqing's intention to safeguard investor interests.

But analysts said Tsann Kuen should not have fallen into the category of 'underachievers' that Guo hoped to punish.

'Tsann Kuen's dilemma provides a snapshot of the embattled B-share market,' Dazhong Insurance fund manager Wu Kan said.

'It is a wake-up call to chairman Guo and the CSRC that the ... B-share problem could be worse than they had expected.'

Beijing created the B-share market in 1992, allowing state-owned firms to raise foreign currency by offering the Class B shares to overseas investors. In Shanghai, B shares are denominated in US dollars, while their Shenzhen counterparts are traded in Hong Kong dollars.

Initially, mainland investors were barred from buying B shares until the regulator liberalised the market in 2001 and allowed domestic investors to invest in B shares with their own foreign currency. The liberalisation led to a boom-to-bust cycle as foreign investors took advantage of the rally to cash out, leaving thousands of mainlanders empty-handed.

But since the late 1990s, mainland companies looking to raise foreign capital have preferred to list on offshore markets such as Hong Kong. To date, only 100-odd companies are listed on the mainland B-share market, while not a single initial public offering (IPO) has hit the market in more than a decade.

Most of the B-share stocks are trading at a huge discount to their peers on the yuan-denominated A-share market.

Former CSRC adviser Anthony Neoh proposed merging B shares with A shares, but the plan was never implemented. Nevertheless, mainland investors played the B-share market, pinning their hopes on the merger and believing the hard-currency shares were good long-term investments. A merger of the market, they believed, could help B shares move in line with the A shares, generating handsome returns.

Now many investors are angered by the prospect that Tsann Kuen might be delisted.

Davis Zhang is among the 2.5 million retail investors who bought B shares. The Shanghai-based investor spent US$20,000 on the shares but is rushing to dump them because, he said, all the signs were that the regulator wouldn't be able to protect his interests, let alone bail the market out.

'The lack of liquidity has already led to low prices of B shares and the delisting rules will cause more companies to be expelled,' Zhang said.

'It will be foolish of us to remain hopeful of a rescue by the regulator.'

Analysts said Tsann Kuen's sorry saga could prompt Guo to come up with new policies to iron out the B-share problem. After taking office late last year, Guo focused on bolstering the A-share market though his efforts have yet to pay off.

Guo's predecessors including Zhou Xiaochuan, now central bank governor, and Shang Fulin, the chairman of the China Banking Regulatory Commission, turned a blind eye to the tiny B-share market, snubbing proposals to reform it.

The total market value of B shares is equivalent to some 150 billion yuan, or less than 0.7 per cent of the A-share market's capitalisation.

Guo, a strong-minded reformist, hasn't made any public comment about the B-share reform since he took the CSRC's helm.

'Now that the B-share market has reached a do-or-die point because of the new delisting rules, it is advisable for Guo to pay attention to the market,' Haitong Securities analyst Zhang Qi said. 'Technically, it's not difficult, but it is up to the regulator to decide whether it's necessary.'


The total value of the mainland's B-share market equates to this amount, in yuan