THE United States Securities and Exchange Commission (SEC) has given the long-awaited approval to US institutional investors to buy B shares on the Shenzhen and Shanghai markets. The so-called China depositories no-action letter, which virtually allows US-incorporated investment companies to invest in Chinese B shares, was issued in New York on Monday. China's two B-share markets, which have traded sluggishly over the past few days, are likely to respond positively to the news. A copy of the letter obtained by the South China Morning Post reveals that the SEC made the decision mainly because the depository and clearing systems on the two mainland exchanges have greatly improved. It is not known how US investment companies will react. However, the New York-based China funds of Jardine Fleming, Wardley and Barings, with total assets of about US$300 million, are expected to be the first to benefit. They have held off investing in B shares in the absence of any guidance from the US regulatory body, although they are not legally prohibited from doing so. Standard Chartered Securities executive director Eugene Yang welcomed the ruling from the SEC. He believed it would unleash huge foreign funds into the mainland B share markets. It could also be seen as an encouraging sign for other China investment funds outside the US that already dealt in B shares and China concept stocks in Hongkong, he said. Jardine Fleming confirmed yesterday that its New York-listed Jardine Fleming China Region Fund had received a no-action letter from the SEC. Without stating clearly how its China fund would take advantage of its new found freedom, Jardine Fleming said it believed fund managers would be given a ''greater scope to achieve the objectives of the fund''. When the fund was launched in July last year, it said there was concern that holding B shares would not be possible because the custody arrangements on the two mainland stock markets might not comply with US securities rules. Under US regulations, every registered management investment company has to maintain its securities in the custody of a system for the central handling of securities. The no-action letter reveals that after representations by law firm Baker & Mckenzie on behalf of the 10 custodian banks in China, the SEC decided not to take any action if the investment companies held B shares on the Shenzhen and Shanghai exchanges. In the case of the Shenzhen operations, the SEC was reassured by the fact that the banks had each acted as a sole registration institution for a particular issue of B shares, maintained a computerised book-entry and issued a share registration receipt inconnection with each trade. The decision was also based on the banks' representation that they were either foreign branches of US banks that had shareholders' equity in excess of US$100 million or branches of foreign banks that had shareholders' equity in excess of $200 million. In Shanghai, the stock exchange had become the central book-entry depository and sole clearing agent, transfer agent, and registrar of all B shares traded, the SEC said. The 10 custodian banks are the Standard Chartered Bank, Bankers Trust Co, Bank of New York, Boston Safe Deposit and Trust Co, Chase Manhattan Bank, Chemical Bank, Citibank, Hongkong and Shanghai Banking Corp, Morgan Guaranty Trust Co of New York and State Street Bank and Trust Co.
