In contrast with the mainland's yuan-dominated A-share market, which has been fluctuating drastically with its recent record highs, the foreign currency B-share market has been moving upward with a steady momentum.

With more investors opening accounts in B shares (US-dollar-denominated accounts on the Shanghai stock exchange and Hong-Kong-dollar-denominated accounts on the Shenzhen exchange), the market gains increasingly heavy leverage within the country's capital market.

It is, therefore, critical to clarify the exact role of the B-share market in the current financial situation.

Established in the early stage of China's economic reform, the B-share market was originally meant as a tool to assist domestic businesses in attracting overseas investors. It made a remarkable contribution to getting the foreign currency needed for economic development when China started to open up.

The economic situation has changed so radically in past decades that China has gone from a shortage in foreign currency to the national holding of the world's largest foreign exchange reserve as of last year

Since 1997, domestic businesses have been eligible to list on overseas stock markets as well as the Hong Kong stock exchange. The H-share stocks traded on the Hong Kong exchange and the "red-chip" shares of the mainland's leading companies traded on foreign markets have attracted large amounts of capital needed by mainland enterprises. As a result, the B-share market has been marginalized in the financing of mainland businesses.

Given the current situation, the B-share market should be repositioned as a market where domestic individuals and businesses can invest their foreign currency in mainland enterprises.

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.

1

2

3

(For more biz stories, please visit Industry Updates)