Winding up the Chinese B share market

It’s rare that anything interesting happens in China’s moribund B share market, but the last couple of weeks have been an exception – even if all the developments point to it no longer existing in the relatively near future.

Owing to China’s capital controls, there are several different types of stock listings used by Chinese companies. To recap quickly:

  • A shares are mainland-incorporated Chinese companies listed on the mainland Shanghai and Shenzhen exchanges and are denominated in renminbi. They can only be bought by mainland Chinese investors and a very limited number of qualified foreign institutional investors.
  • B shares are mainland-incorporated Chinese companies listed in Shanghai and Shenzhen and are denominated in US dollars (in Shanghai) and Hong Kong dollars (in Shenzhen). They can be freely bought both by foreigners and by mainland investors with foreign currency accounts.
  • H shares are mainland-incorporated Chinese companies listed in Hong Kong. They can be freely bought by foreigners.
  • Red chips are companies controlled by the Chinese state, but legally incorporated outside mainland China and listed in Hong Kong. Again, they can be freely bought by foreigners.
  • P chips are companies controlled by private sector Chinese businessmen that are legally incorporated outside mainland China and listed abroad. Usually, P chip is used to mean specifically Hong Kong listed stocks, with S chip being used for private firms listed in Singapore and (less commonly) N share for US-listed Chinese companies and L share for London-listed Chinese companies.

The same mainland company could have any combination of A shares, B shares and H shares in issue, but these shares are not fungible and can trade at different prices. By definition, a Red chip or a P chip cannot have other types of share in issue, although they could trade on more than one foreign stock exchange.

Of all these, the B share market is the most irrelevant. While it was originally intended to be the main route for foreigners to hold Chinese stocks, it was quickly superseded by firms listing in Hong Kong and other non-mainland markets. There are only 107 companies with B shares listed (54 in Shanghai and 53 in Shenzhen), volumes are generally light and investor interest is very limited.

So there is a long standing question as to how the B share market will eventually be closed down. For many investors, the assumption has been that when the Chinese authorities finally allow freer foreign access to the A share market, B shares will simply convert into A shares.

However, it’s difficult to imagine the A share market being fully opened up in the near term – hence some firms are looking at other ways to tidy up their legacy B share listings. And if conversion to A shares isn’t a possibility, the other obvious alternative would be converting B shares to H shares – the Hong Kong market is much more liquid and more foreigners are willing to buy H shares.

The snag with this solution has been that while mainland investors can hold and trade B shares, they can’t directly trade H shares. So any mainland individuals on a company’s register would be left with shares they couldn’t easily sell after conversion.

But this now seems to have been resolved. In mid December, China International Marine Containers (CIMC) was the first firm to convert its B shares to H shares, offering existing B shareholders the choice between cashing out immediately or having the option to sell later through special arrangements with mainland brokerage Guotai Junan Securities and its Hong Kong subsidiary.

According to a report in Caixin, another 30 firms are considering doing the same, including Vanke, China’s biggest property developer. The fact that CIMC rose 30% on its H share debut will certainly encourage them to feel they can get a better valuation in Hong Kong.

As the Caixin article notes, not all B share companies are probably suitable for conversion to H shares – but for the remaining ones that are too small or illiquid, forcible delisting seems possible (the regulator has been making moves in that direction lately). So once the major B shares move across to H shares, it seems likely that the rest of the market will be on its way out.

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