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. The problem is, trading by locals has now reached a level which Beijing feels is threatening to disrupt foreign exchange management. By some estimates, domestic residents are said to account for 50 per cent of B-share trade in Shanghai and 70 per cent in Shenzhen. B-share purchases are paid for in foreign currencies. Massive conversion of yuan into hard currencies to pay for the shares is tantamount to partial convertibility of the yuan on the capital account, a step which China frowns on at the moment. Reportedly under pressure from the State Administration of Foreign Exchange Control, the China Securities Regulatory Commission (CSRC) - the national securities watchdog - issued the first warning on July 1 to stop mainlanders from opening new B-share accounts. This was ignored by brokerages. So, under CSRC orders, the two exchanges reluctantly issued separate notices last weekend to ban domestic investors from buying new B shares. By all accounts, the notices have not achieved the intended result. Local punters have again ignored the warning in the belief the CSRC cannot afford to come down hard on them. How can the CSRC liven up the B-share market while keeping local investors at bay? In the long run, the question is redundant, with the merger of the A and B share markets. For now, China seems determined to maintain the distinction between them. There are 82 B-share companies equally split between Shanghai and Shenzhen. Except for a handful, most are corporate wash-outs. The point is, the CSRC will have to expand the liquidity and size of the market with good listing candidates to create a robust market. If the market is dominated by corporate duds, foreigners might as well buy red-chips and H-shares in Hong Kong. Foreign participation in China's equity markets through the B-share market has benefited the two exchanges and listed companies through stricter expectations in reporting and regulatory standards. To ensure a sustained flow of portfolio investment, market regulators and players will have to place great emphasis on strengthening fundamentals and the legal framework. This is an urgent task, as foreign interest in Chinese shares is waning.