THE present system for underwriting B shares on the Shanghai and Shenzhen exchanges has foreign merchant banks baffled, according to specialists in the sector. Concerns have been raised over the requirement in Shanghai that a lead underwriter in any B share issue has to be a mainland domestic brokerage. This is despite the fact that the average domestic brokerage has little experience in underwriting jobs and a small client base. Domestic brokerages which have secured lead underwriting jobs often seek well-connected foreign merchant banks to help the underwriting. One merchant banker who has dealt with mainland B shares said yesterday rules laid down by the Shanghai securities authorities had created a market in which underwriters could not compete freely. PBI Securities Hongkong general manager for China Eric Lee Ming-chuan said a better method of issuing B shares could be to combine a placement and an open offer, depending on the size on the issue. ''In the case of a big issue, it makes more sense if a pre-listing placement has been done before the actual open offer begins. This will ensure a reasonable subscription level is attained,'' he said. B shares are offered publicly in Shenzhen to foreigners such as Hongkong investors. But retail investors in Hongkong still need to go across the border if they want to subscribe for B shares. Starting this year, initial public offerings in Shenzhen have been switched from private placings to open offers. Mr Louis Koo Fook-sun, corporate finance director at HG Asia, described the current way B shares were offered in Shenzhen as ''ridiculous''. Yet he refused to attach sole blame to the mainland authorities, and said the problems were widely considered understandable in any developing securities market. The lack of a complete regulatory system in China meant a greater burden on underwriters, he added. Mr Bob Out, executive chairman of PBI Securities Hongkong, said China was still a very localised market. But he forecast an unlimited upside for the market - home to a rapidly growing economy and with the highest economic growth in Asia last year, and possibly in the coming years.