China Financial Products and Services Report 2006 - (Includes CD-ROM)

Author: Yin Jianfeng
Publisher:
Publish Date: 2006-08-01
Features: Chapter 2: Stock Exchanges: B Shares
Yin Zhongli
The formal name of B shares is Special Purpose Shares denominated in RMB. They are priced in RMB but subscribed to and traded in foreign currency, listed and traded on domestic stock exchanges. B shares are a product of China during a specific historical period, primarily aimed at attracting foreign investment. Compared to other domestic stocks, the uniqueness of B shares is reflected in two aspects: First, they are priced in RMB but traded in foreign currency; second, before 2001, only foreign residents and institutions were allowed to invest, while domestic residents and institutions were not permitted to invest in this market. After 2001, B shares began to open to domestic investors. Therefore, before 2001, the B share market was essentially an offshore stock market. In recent years, with the gradual opening of A shares to foreign investors and the increasing scale of overseas stock issuance by Chinese companies, B shares have entered a phase requiring repositioning.
I. Historical Review
B shares were a financial innovation born out of China's foreign exchange shortages during the early stages of its reform and opening-up. They were introduced under strict foreign exchange controls. In the early 1990s, China faced severe capital shortages domestically, and the scale of Foreign Direct Investment (FDI) was also very small. In this context, directly introducing foreign capital into China's capital market was undoubtedly an extremely attractive idea. However, this idea faced a critical obstacle at the time—strict foreign exchange controls. To achieve the goal of attracting foreign investment and developing China's capital market while avoiding potential shocks to the fragile domestic market after foreign capital entered, a creative idea—establishing B shares with offshore characteristics—naturally emerged. Based on the development of B shares after their inception, their development stages can be broadly divided into two phases: the growth phase from 1991 to 2000 and the decline phase after 2000.
(1) Growth Phase: 1991–2000
Only B Shares—The Birth of Vacuum B Shares
Vacuum B Shares were launched on November 30, 1991. At that time, Shanghai Vacuum Electronic Devices Co., Ltd. issued 1 million shares of RMB-denominated special purpose stock with a face value of 100 RMB to overseas investors. This was the first B share in the Chinese securities market. On the following December 18, Shenzhen issued nine B shares, including Shenzhen Nanshan Glass B and Shenzhen Zhonghua B. In this unprecedented stock issuance, not only five of the 12 first-tier members of the Hong Kong Stock Exchange participated in underwriting Shenzhen B shares, but top investment banks like Morgan Stanley also joined the underwriting team, marking a heyday for the Chinese securities market. The grand opening of Shenzhen B shares was not only reflected in its participation standards but also in the high demand for B shares. The oversubscription ratio for Shenzhen's first B share issuance reached 5 times, and even the World Bank and the International Finance Corporation went to great lengths to "get in through the back door" to purchase Shenzhen B shares. For a newly established emerging market, this was indeed an extraordinary record.
By the end of 1991, Shanghai and Shenzhen were in a rush to issue B shares. This was only one year after the establishment of the Shanghai Stock Exchange and less than half a year after the establishment of the Shenzhen Stock Exchange. At that time, only 14 stocks were listed on the Shanghai and Shenzhen markets combined. In this sense, China's B share market and A share market started almost simultaneously. While A shares were still establishing themselves, Shanghai and Shenzhen moved quickly to issue B shares, reflecting both the urgency of the pioneers of China's securities market to catch up and their ambitious desire to go global. During this period, the issuance and listing of B shares were mainly regulated by two local regulations: the Provisional Measures for the Administration of RMB-Denominated Special Purpose Shares in Shanghai and the Provisional Measures for the Administration of RMB-Denominated Special Purpose Shares in Shenzhen. It wasn't until November 2, 1995, that the State Council Executive Meeting discussed and preliminarily approved the Provisions of the State Council on the Listing of Foreign-Denominated Shares of Domestic Listed Companies, marking the formal birth of the first national-level B share regulation in China. This regulation stipulated the conditions that companies must meet to apply for B share issuance and the identities of investors who could participate in B share market transactions, with its implementation rules issued in 1996. This regulation and its implementation rules provided a comprehensive framework for the B share market.
The Provisions of the State Council on the Listing of Foreign-Denominated Shares of Domestic Listed Companies of 1995 prohibited domestic residents from investing in B shares. To regulate the participation of domestic residents in the B share market, the China Securities Regulatory Commission (CSCC) issued the Notice on Strictly Managing B Share Account Openings on June 28, 1996, reaffirming that only foreign investors could hold B shares. On September 20, the CSCC issued the Notice on Cleaning Up B Share Accounts, requiring the cleanup and regulation of accounts that did not meet the requirements, and gradually and properly addressing the lingering issues of B share accounts. These regulations standardized the participants in the B share market, stipulating that investors in the B share market were limited to natural persons, legal persons, and other organizations in foreign countries, Hong Kong, Macau, and Taiwan, as well as Chinese citizens residing abroad.
Although the regulatory authorities strictly limited the investor base for B shares during this phase, it was precisely during this phase that the original purpose of establishing B shares was fulfilled: more than 90% of B share financing was completed during this period. P20-21