Observers have struggled to understand the impact on China's foreign exchange policy since China's financial authorities announced last week that Chinese people may invest in the B-share market that were previously reserved for overseas investors. B shares are traded in US dollars in Shanghai and Hong Kong dollars in Shenzhen.

A statement released Monday by the People's Bank of China said the "two are basically irrelevant of one another, although a more sophisticated capital market will be conducive to the country's pursuit of renminbi's full convertibility."

The renminbi is convertible for current accounts, which mainly cover foreign trade and foreign companies' conversion of profits to their home country currencies.

But under capital accounts, which covers the investment in securities market, it is not convertible.

China has said it will eventually make the renminbi fully convertible, but only after the authorities acquire adequate capabilities to regulate the financial markets.

It refuses to offer a timetable for the convertibility of the local currency.

From the beginning of China's share market, the country created two separate markets, -- the A-share market for domestic investors -- and B-share market.

Many domestic institutions have entered the B-share market using regulatory loopholes. The appeal is that B shares cost less than A shares. Companies that have both A and B shares offer the same per share dividend to all shareholders.

There are no reports that foreign investors have significant presence in the A-share market.

The central bank stressed in the statement that after the new reform of the B-share market, the Chinese still need hard currency -- not renminbi -- to buy B shares. The A-share market remains closed to foreigners.

Analysts have said domestic investors' keen interest may trigger the revival of the foreign currency black market. Regulators also showed their concern on this.

But it said the impact to the stability of the Chinese currency is controllable.

The exchange rate of Chinese currency is closely related to the country's balance of international payments, which in turn is basically decided by the country's foreign trade positions.

A persistently strong trade surplus and favorable economic situation will be adequate underpinnings for the renminbi's exchange rate, the central bank said.

The financial authorities should intensify its crack-down of illegal transactions of the foreign currency black market, bank officers said.

The exchange rate of the US dollar to renminbi in the black markets of major Chinese cities have been rising slowly after the country announced the reform of B-shares.

(China Daily 02/27/2001)