The B-share market will provide a good channel for Chinese to garner a sound return on their foreign currency.

The renminbi is facing heavy pressure to appreciate, not only because of the hot money flowing into the country but also because of the foreign currency and foreign assets held by Chinese individuals and businesses.

According to the statistics of the State Administration of Foreign Exchange, the foreign currency remitted into China has been rising dramatically since July 2005, yet bank deposits in foreign currencies have not been growing at the same pace.

It indicates that individuals and businesses owning the foreign currencies are selling them to buy renminbi.

The average price of stocks on the B-share market is about half the average price of A shares. Theoretically, B-shares could double in value once the B-share market is subject to the same policies as the A-share market.

When the B-share market is geared up, individuals and businesses will be more willing to invest their foreign currency rather than convert it into renminbi. This would ease pressure to revalue the renminbi.

At the same time, if domestic companies could get the foreign currency they need from listing in the B-share market, they would stop bringing in foreign currency pooled from overseas stock markets, further reducing the pressure for renminbi revaluation.

However, several arrangements must be made before revitalizing the B-share market.

Currently, individual mainland investors are the majority investors in the B-share market.

Before the B-share market was opened to domestic individual investors in February 2001, it was mainly composed of foreign investors. By the end of 2002, domestic investors held 82 percent of all B shares while foreign institutional investors accounted for 1.5 percent.

Mainland institutional investors are still not allowed in the B-share secondary market. This has made the B-share market a rare case in capital markets where individual investors dominate.

The ban on domestic institutional investors was imposed out of concern that the foreign currency pooled from the B-share market would flow into the pockets of institutional investors instead of the businesses in need of the assets. This concern was a result of the foreign currency shortage, which has long since vanished.

1

2

3

(For more biz stories, please visit Industry Updates)