What Was Behind the Steep Fall in China's B-shares?

Economic Observer Online
Translated by Qi Changlong and Cheng He
Apr 29, 2011
Original article: [Chinese]

China's B-share market, the two small foreign currency-denominated boards that operate out of both Shanghai (US dollars) and Shenzhen (HK dollars) and are open to trading by foreign investors, had been viewed as a safe bet recently, with rumors that the thinly traded boards would be mergered with either the dominant A-share market or with a planned international board helping to drive the Shanghai B-share index up 26 percent over the 12 months through to April 21. On Apr 15, the index hit an historical high of 329.54 points.

However, both boards witnessed two sudden drops last week, with the combined B-share index which measures movements on both the Shanghai and Shenzhen boards falling a total of 8 percent over April 27 and 28, in effect wiping out the the gradual gains accumulated over the past 6 months.

The market had already started to shows signs of weakening on April 22, which continued through into the following two trading days, posting a cumulative decline of 2.58 percent over that period.

However, it was the 5% one-day drop on Apr 27 that startled investors, especially as there was no clear indication of what was causing the index to decline so quickly. Of the 108 companies listed on both boards, only 4 on the Shenzhen board saw their stock prices rise that day.

The sharp drop continued through into Apr 28 with turnover on both days more than double the average daily trading value of about 70 million yuan.

Rumors quickly spread as to what could be behind the sudden decline.

Though most analysts agreed that the fall was due to profit-taking by investors following the sustained robust growth in the index over the past ten months.

As Yang Jian, research director from Zehui Investment Company, put it "The B-shares had managed to maintain strong momentum since last June with no substantial adjustments, and this drop is probably due to the internal need for correction."

However, there is still no consensus on what factor actually triggered the swift adjustment.

Rumors of possible drivers include an outflow of hot money at the news that the US Federal Reserve plans to step back from its policy of quantitative easing soon, as indicated during the press conference following the Federal Reserve meeting on April 27, a possible levy of capital gains tax on B-shares, withdrawal of Japanese capital after the earthquake or a general move among major foreign investors to short China stocks.

But a more widely accepted argument is that news has leaked that rules out the possible merger of B-shares with either the A-share market or a proposed international board.

Many had anticipated that the B-share market would be incorporated to the A-share market, which has a much higher valuation, before the launch of the international board, or that B-shares would be transferred to the international board after its launch.

However, recent information from the regulators indicated that the soon-to-be-launched international board would mainly targets high-profile international "top 500" companies, suggesting that it was very unlikely that B-shares would be merged into this new board.

Gui Haoming, chief analyst with Shenyin & Wanguo Securities, said the B-share market will coexist with the international board for a long time, until the regulators figure out an ideal way to consolidate it with the H-share or A-share market.

Unlike A-shares which are traded in RMB and are largely closed to foreign investment, B-shares refer to those traded in either US dollars (Shanghai) or HK dollars (Shenzhen). The trading volume on the B-share market is tiny compared to the main boards of the Shanghai and Shenzhen stock exchanges and the number of companies issuing B-shares is also very small when compared to the A-share market.

Links and Sources
Economic Observer Online: B-shares Surge on Hot Money Flows and Rumors of Merger