B-share market needs to weed out corporate duds

Despite two official warnings in three months to keep out of the B-share market, mainland investors show few signs of heading for the exits.

Mainland buyers continue to pick up the shares originally reserved for foreigners because of their huge discount to equivalent A shares, which are denominated in yuan and reserved for domestic residents.

Why pay 38 yuan (about HK$35.34) for Shanghai Lujiazui Finance and Trade Zone A shares, when you can get the B shares for just 90 US cents? Why not buy Shanghai Chlor-Alkali B shares at 22 cents instead of paying 8.24 yuan for the A shares? At an exchange rate of 8.30 yuan to the greenback, Lujiazui B shares are 20 per cent of the A-share price. Chlor-Alkali B shares are bargains, against the A shares.

Little wonder, then, that domestic punters are showing great enthusiasm for the shares, which are sold in US dollars in Shanghai and Hong Kong dollars in Shenzhen.

Foreign interest has waned because of poor performance and disclosure standards of most B-share companies. Indeed, many are sitting on huge losses after buying the shares at their peak in 1993, when Chinese stocks were the flavour of the year.

Today, the Shanghai B-share index is trading at about half its December 1993 peak. Shenzhen, which has been more aggressive in luring domestic buyers, is faring a little better.

Although the State Council has made clear from the start these shares are for foreigners and Hong Kong, Macau and Taiwan residents, local securities regulators have turned a blind eye to the domestic build-up for the simple reason that it helps rev up an otherwise lackadaisical market.