B-Shares

What Are B-Shares?

The term B-shares refers to equity share investments in companies based in China. These shares trade on two Chinese stock exchanges: the Shanghai Stock Exchange and the Shenzhen Stock Exchange in mainland China. Shares are denominated in renminbi, which is the national currency of China, but settle in U.S. dollars (Shanghai) and Hong Kong dollars (Shenzhen). They are open to investment by individuals in China who have foreign currency accounts as well as foreign investors.

Understanding B-Shares

Although China’s stock market is one of the largest in the world, its equity markets are relatively new, having only started development in the early 1990s. Rapid economic growth and the rise in attractive corporate expansion in China attracted a lot of interest from international investors. But investment in Chinese companies was traditionally closed to foreigners. This began to change, though, between the late 1990s and early 2000s, when the country began inviting investment from people outside the country.

Chinese B-shares allow foreign investors to take part in the country's equity markets. B-shares are also called domestically listed foreign investment shares. They trade on two of the country's leading stock markets, the Shanghai Stock Exchange and the Shenzhen Stock Exchange. The face value of stocks that fall into this category is in the renminbi (the local currency) but transactions settle in foreign currencies, namely U.S. dollars in Shanghai and in Hong Kong dollars (HKD) in Shenzhen.

B-shares were initially offered to target investment from foreign investors. The China Securities Regulatory Commission opened up investment in B-shares from local Chinese investors in February 2001. By opening up this investment channel, local residents are allowed to trade these shares on the secondary market.

A total of 54 companies trade B-shares on the Shanghai Stock Exchange while 55 shares trade on the Shenzhen Stock Exchange. These companies represent a variety of sectors, including retail, electronics, machinery, real estate, tourism, and food and beverage.

Special Considerations

B-shares represent one form of equity investment available to investors who want to take advantage of the Chinese market. A-shares and H-shares are also open to investors who live outside China.

A-shares trade on the Shanghai and Shenzhen exchanges. These are companies that are incorporated in China. The face value of these shares and settlement are in renminbi. China generally only allowed residents to trade these shares but opened up this class of shares to foreigners under the Qualified Foreign Institutional Investor program, the Renminbi Qualified Foreign Institutional Investor program, and the Stock Connect program.

Shares of companies incorporated in China that trade on the Hong Kong Stock Exchange are called H-shares. They trade in HKD. Since shares are traded in Hong Kong, there are no bans on investment. As such, foreign investors can buy and sell H-shares. Chinese residents can also trade shares provided they are qualified domestic institutional investors (QDII).

B-Shares Vs. Alternative Investments

China is one of the world's most advanced and sophisticated emerging market economies. As such, investments in Chinese stocks may have high risks but they also have a high potential for gains. There are investment funds that exist for retail investors who prefer to invest in diversified portfolio offerings over individual shares. Most diversified portfolio offerings are structured as mutual funds or exchange-traded funds (ETFs).

There are many other funds for investors who want exposure to China’s equity market, including:

• The Shanghai Composite Index, which is a benchmark index that holds all A-shares and B-shares offered by Chinese companies on the Shanghai Stock Exchange, provides one of the most comprehensive indexes for tracking Chinese equities.
• The S&P China Broad Market Index is comprised of 769 of China’s publicly traded equities available for foreign investors with market capitalizations ranging from $493 billion to $68 billion.
• Investors may choose to invest in the SPDR S&P China ETF (GXC), which is a passively managed ETF that seeks to replicate the holdings and performance of the S&P China Broad Market Index.

Investing in multiple share classes from China can be complex. There are few funds that offer comprehensive market exposure to both A-shares and B-shares. The db X-trackers Harvest MSCI All China Equity ETF (CN) is one of the market’s top funds offering this diversification. CN tracks the MSCI China All Shares Index which includes B-shares, A-shares, and H-shares.