THE recent buying spree by Chinese investors in the B-share market, which was formerly reserved for foreigners, spurred a sharp rise in forex trading in both the legal and illegal markets.

However, prices of some B shares have hit record lows in recent days, which sparked speculation that the market would face huge price fluctuations soon.

"After a period of high trading, the trading volume of B shares by private investors has fallen to the same level as that before Beijing authorities suspended the trading of B shares on February 19," said Zhang Xiaobin, a spokesperson for Bank of China (BOC) Shanghai Branch.

He attributed the drop in volume to the gradual slide in some B-share prices.

On February 26, domestic investors were given the green light to open B-share trading accounts. Trading volume of foreign currency at BOC Shanghai Branch that day alone was 2.6 times the average. BOC Shanghai would not disclose the exact trading volume.

Other banks in Shanghai reported similar trends, including Bank of Communications (BoCom) Shanghai Branch which also witnessed a week of sharp rises in trading volume, with daily growth rate of 30 to 40 per cent since February 26.

But upon the opening of the B-share market, there was widespread concern about the local forex market as a huge amount of hard currency was transferred into B-share trading accounts.

"Despite the declining volume of forex trading by private investors, the worry still looks unnecessary since the trading maintained the volume before B share market opened up," said Zhang from BOC.

However, since Beijing authorities allow people who opened hard currency accounts after February 19 to enter B-share market on June 1, Li Jun from BoCom Shanghai Branch predicted there would be another surge in forex trading volume around June.

"By then, it is possible that a considerable amount of foreign currencies will be exchanged into US and Hong Kong dollars and be transferred out," Li said. "Forex trading by private investors might be negatively affected."

He expected that some hard currency might flow back into forex trading when risk in the B-share market increases.

Though the B-share market is now open to domestic investors, there are still only limited channels for Chinese residents to get hard currency.

Therefore, the black market for hard currency generates large illegal profits for some scalpers.

Around February 26, the exchange rate for foreign currency even increased to as high as 9 yuan for 1 US dollar.

"Some scalpers even got a daily profit of 300,000 yuan ($36,188)," said one insider who declined to be identified.

The local authorities also stepped up their crackdown on such illegal scalpers in support of the opening of the B-share market. This most affected those "low-grade" scalpers who make money by asking for "change money" at banks' doors.

"But some scalpers continued big exchanges via telephone or other ways," the insider said.