Today, investors in China's B-share market are bracing for a probable mini-meltdown. Chinese citizens, who hold B-share accounts with brokerages and are responsible for between 50 per cent and 70 per cent of trading at the Shanghai and Shenzhen stock exchanges, will be allowed to wind down their positions but not to purchase more stocks. Such a draconian measure is needed to prevent hard currencies from being drained from the state system. Chinese citizens, who otherwise would have deposited their foreign currencies in government-owned banks, have dabbled in the B-share market. The deeper they get mired in the market the more hard currencies flow out of the state system.
In theory, trading B-shares of mainland companies is limited to foreigners, residents of Hong Kong and Chinese nationals living overseas. But greed and mismanagement has spawned an exponential growth in trading by mainlanders. The situation apparently has gotten out of hand, forcing securities-watchdog China Securities Regulatory Commission to issue warnings earlier this year. Not until this past weekend, however, did the Shanghai and Shenzhen stock exchanges take the warnings seriously and implement drastic actions to rectify errors.
As this newspaper reported yesterday, the exchanges have banned - with immediate effect - mainlanders purchasing B-shares. They would be given opportunities, albeit without fixed timetables, to dispose of their holdings.
Faced with a lacklustre B-share market in recent years, exchange officials might have turned a blind eye to mainlanders opening accounts and trading B-shares. They might have hoped this would revive activities in a market beset by low turnover and poor performances.
They misconceived. Their tolerance, if not encouragement, of Chinese citizens trading B-shares defies Beijing's objective of attracting foreign investment through selling shares in Chinese firms to foreigners and Hong Kong residents. Many foreign investors have purchased B-shares directly or through China funds.
To attract foreign investors, Chinese companies must improve management, become more transparent and meet stringent disclosure requirements. More information should be made available to investors. The trading of B-shares may face a demise in the short-term. But like the mythical phoenix rising from the ashes, one must hope that China's B-share market will become more vigorous in the long run.