There’s nothing like a thorough spring clean to bring things into the open. The only problem, of course, is that you then have to deal with all the long-forgotten junk that turns up.
Guo Shuqing, China’s chief securities regulator, would probably sympathise. The delisting rules his office introduced recently, as part of a zealous reform package, have shed light on a dusty old corner of the country’s securities industry: the B-share market.
Guo introduced the new rules in a bid to clear out some of the weaker A-share companies, but a requirement for loss-making or illiquid companies to delist is expected to have even bigger consequences for China’s B-shares, many of which are poorly performing.
Launched in 1992, the B-share market was originally designed to cater to foreign investors, with stocks denominated in US dollars in Shanghai and Hong Kong dollars in Shenzhen. Slightly more than 100 companies trade on the exchange today, with very thin market volumes and no new listings since 2000. Overall, B-shares account for less than 1% of Chinese brokers’ business.
Edward Huang, a strategist at Haitong International Securities, attributed the stagnant market to the restrictions on participants. “Retail investors, the majority participants in China’s stock markets, don’t have easy access to foreign currency, hence there’s little resource available for them to invest in the market,” he said. “Institutional investors, on the other hand, don’t have the incentive to get involved in a stagnant market.”
B-shares once fulfilled an important role — helping China to attract foreign capital when it really needed it. But the government also imposed foreign exchange controls at the same time, severely limiting the potential size of the market.
“In retrospect, it looks contradictory, but the arrangement seemed to make sense in the late 1980s and early 1990s, when the renminbi was not as internationalised as it is now and the Chinese government didn’t want a huge inflow and outflow of foreign currency to impact the economy,” said Huang.
Contradictory policies are nothing new to China. The country is encouraging trade partners and overseas investors to use renminbi, yet it also imposes extensive capital and monetary controls. It encourages private investment, but has opened only a limited number of sectors to non-government investors.
However, now the B-share market has been dragged into the spotlight, the contradictions are hard to ignore. With A-shares increasingly open to foreign investors and all the focus on internationalising the renminbi, the B-share market seems redundant. So what to do about it?
“The regulators don’t have a clear idea what they want to do with it,” said Huang. “The exchange operators are still obliged to cater to trading in B-shares, which will be even more marginalised once an international trading board is established.”
Widely discussed solutions include relocating the B-shares to the A-share market or moving the Hong Kong dollar shares to the stock exchange in Hong Kong, though a transfer across the border would face many regulatory obstacles, including the fact that mainland investors are not officially allowed to buy Hong Kong stocks directly.
The first option has also drawn criticism. Some worry that the big price difference between stocks on the two markets would drag down prices overall. Others complain that the A-share market is too often viewed as the solution to every problem in China’s economy, making it a dumping ground for heavily indebted and poorly managed state-owned enterprises.
It will not be an easy decision, particularly as the economy continues to sputter, but it would be ironic if Guo’s attempt to improve the quality of the A-share market led to the introduction of several dozen underperforming B-shares. Not quite the spring clean he had in mind, probably.