Following their respective openings in December 1990 and July 1991, the Shanghai and Shenzhen stock exchanges began offering B-shares exclusively to foreign investors in February, 1992. As at 26 February, 1993, Shanghai had listed ten B-share and Shenzhen had listed nine. A further 20 new issues are expected in Shenzhen this year and five in Shanghai.
Owners of A-shares (Chinese nationals only) and B-shares have exactly the same rights with one exception: B-share holders receive their dividends in foreign currencies. Both A and B shares are quoted in renminbi, but B-share transactions are settled in US dollars in Shanghai and Hong Kong dollars in Shenzhen. Exchange rates are based on the swap rates quoted in the respective cities. In Shanghai, the previous week's average closing rate is used, while in Shenzhen the previous day's closing rate applies. B-share transactions are settled on a trading day plus three days for clearance (T + 3) basis. Trading of B-shares is scripless and must be conducted on the exchange floor; off-exchange crossing is not permitted. Short-selling is also prohibited, and purchased shares cannot be sold until four days after the initial trading day.
In order to trade, overseas foreign investors must first contact one of the authorised foreign brokers (AFB). The AFB then relays the order to one of the authorised local brokers (ALB), of which there are nine in Shenzhen and five in Shanghai.
Foreign investors in China can contact AL1fs directly. Information on daily share prices and the volumes traded for both exchanges are available from Reuters News Service.
Trading costs on both exchanges are significantly higher than those in Hong Kong. Shenzhen requires a minimum trading volume of 2,000 shares, while Shanghai requires 10.
While the systems adopted by both Shenzhen and Shanghai are in some ways similar to Hong Kong's, they also differ in significant ways, some of which are of concern to foreign brokers. For example, the fact that one can sell only those shares registered in one's names rules out day trades (because it takes three days to register the shares) and this means less flexibility for investors and less turnover for brokers. Also, the T + 3 settlement date may be insufficient for overseas (non-Hong Kong) traders. Equally rigid is the rule that once an order has been placed with a local broker, it is valid for the immediate trading day and cannot be withdrawn regardless of what happens in the market.
Nominee accounts are also not permitted in the Chinese exchanges, in part to prevent short-selling and trading in B-shares by Chinese nationals. Shareholders must declare their holdings to the local registrar and can only hold shares in accounts under their own names. This will add red tape ? and extra fees ? to the transactions that brokers undertake on behalf of their clients.
Overall, the B-share market in China must be regarded as fledgling and, therefore, still lacking in certain areas. Chinese company accounting standards, for example, are not up to international standards and legislation protecting shareholders' interest is inadequate. While the Chinese authorities are keenly aware of these shortcomings and committed to correcting them, until the required laws are in place, there will be greater uncertainty and greater risk in this market. Still, investors appear willing to take that risk. Given the limited number of B-shares available, demand has far outpaced supply and the prices have been seen to soar, reaching a peak in mid-May of approximately 240 in Shenzhen; and 140 in Shanghai. Currently, the indexes stand at 178 and 87 respectively, though both have dipped a lot lower.
Reprinted with the permission of Hong-Kong Bank China Services Limited from Its publication, China Briefing.
Further information supplied by South China Securities.
Accountancy reforms
As reported on page 4, international accounting firm, Deloitte Touche Tohmatsu (DTT) has won a US$2.6m contract to develop accounting standards for China.
Currently, regulations and accounting principles applicable to joint ventures deviate from International Accounting Standards in several key ways:
* The lack of provision for bad or doubtful debts.
* Capitalisation of certain expenditure
which would have been written off immediately under IAS.
* Dividend accounting for the results of subsidiaries and associates.
* No restatement of monetary assets and liabilities denominated in foreign currencies to reflect fluctuations of exchange rates.
While the new standards are being developed, short term solutions are in operation. These include the requirement that all B-share issue companies have their annual financial statements audited and certified by international public certified accountants in accordance with the IAS.
Shanghai's steps to upgrade
The Shanghai Securities Exchange has announced a plan to improve its facilities and services this year.
These efforts include increasing B-share transactions, issuing new stocks, admitting more member companies, stimulating treasury bond futures trading, opening new trading centres, strengthening links with the Shenzhen exchange and publishing more information on listed companies. *
The year ahead
While trading on the China's Shenzhen and Shanghai markets continues to demand increased expenditure and until adequate regulations and standards are finalised, fund managers are going to be tempted to look elsewhere for Chinese stocks.
The weakening on the two Chinese markets in December last year, which followed the announcement of the State Council's plans to list several key enterprises in overseas markets such as Hong Kong, highlights a key drawback for Shanghai and Shenzhen. The rapid weakening of the Renminbi, the decline of the RIM/US swap rate, and an expected devaluation in the official exchange rate has not only reduced foreign investors' profits, but makes the stocks seem even more expensive. The opportunity to buy Chinese stocks in the more liquid and regulated markets of Hong Kong and the US is a tempting one.
Nine state industries are to be listed on the Hong Kong market during 1993.
However, the outlook for the two Chinese markets is not a bleak one. Improvements in the market infrastructure ? the establishment of an independent clearing and registration company in Shanghai, for example, as well as its supervision and coordination with the new Securities Commission acting as regulator and administrator in Shanghai ? are just some of the positive factors. On top of this, the collapse of share prices in the second half of last year has limited the prospect of flotations, suggesting that the new issues market should continue to perform well.