THE fall in the yuan has raised the price earnings ratio of B shares, despite the fall in share prices. On a chart, it looks like B shares have come down once more into a buying range, but with yuan earnings now worth much less in US dollar terms, today'schart may be misleading. Surely, the Beijing Securities Commission and the Foreign Exchange Control Bureau will soon allow mainland investors to buy B shares. Of the 11 listed B share companies in Shanghai, eight are trading below issue price and turnover is minimal. Discounts of B shares to A shares range from 65 per cent to 83 per cent. This year's P/Es range from nine to 22. In Shenzhen, only one or two of the 13 listed B share companies are showing a loss on the original subscription price, but these are the most recent listings, setting a bad precedent for any hope of further issues. Discounts to A shares are less than in Shanghai, ranging from 36 per cent to 72 per cent, with this year's P/Es ranging from seven to 27. Turnover on the Shenzhen market, however, is almost non-existent and price falls can be sharp. Investors outside China clearly prefer the much more active and better regulated Hongkong stock market. An investment in the territory is in many senses an investment in China; it is also an investment in the United States, since Hongkong has effectivelyadopted the US interest rate and currency systems. This all leaves China's B share markets rather friendless. If China is to continue to raise foreign currency by the sale of B shares, we need to see lower new issue prices and must expect locals to be allowed to buy B shares. Only in this way will volumes increase sufficiently to re-attract foreign interest. The yuan in the swap centres has plunged below 11, after being held steady for most of the first half of the year. With mainland Chinese buying foreign currency at almost any price, it must be a good idea to put these foreign funds to productive use by allowing subscription to new B share issues. This will channel foreign currency savings back to Chinese industry. I realise a certain percentage of Chinese companies' equity needs to be held by foreigners in order for corporate tax concessions to be granted, but it may be necessary to revise these regulations. Another problem the authorities face in considering allowing locals to buy B shares must be the impact it will have on A share prices. If locals can choose between A and B, then clearly they will sell A shares to buy B shares to take advantage of the substantial price differences. But we are talking here of relatively few companies that issue B shares and, in any event, it is in the long term interests of China's capital markets to encourage a more reasonable valuation of shares. Prices of A shares are simply too high; P/Es are about three to four times higher than for B shares.