China B-market move hailed by analysts

A Chinese investor peruses B Share charts

HONG KONG, China -- China's decision to allow its own investors to trade hard currency B shares will lead to a massive boost in market liquidity, analysts say.

They say the move to free up its B-share markets will make those markets more attractive to global investors, creating an influx of funds and making it harder to manipulate its markets.

China said on Monday it would make it legal for Chinese citizens who hold foreign currency to open B share accounts and trade B shares previously reserved for non-Chinese investors.

"This is an extremely positive step," says Merrill Lynch chief economist Andy Xie. "It's going to significantly boost trading volumes and liquidity, and it will encourage investors to arbitrage in the markets, which will lead to much greater efficiency."

QUOTE "The Shanghai index is likely to touch the 100 mark in the near term upon this move. It helps pave the way for the merger with A shares and the price gap between the two will narrow." - John Lu - Barings

Xie says there is $60 billion held in bank deposits in China, which is unable to be traded because of the former restrictions.

He adds that the B share market is worth just $8 billion and has only 114 firms listed on its boards -- many of them poor quality -- while the A share market is worth closer to $600 billion.

The A share market is reserved for Chinese investors only.

Scheme being worked out

A detailed scheme was being worked out by the markets watchdog and other authorities and would be implemented soon, the Chinese Xinhua news agency said.

China's B shares were the best performing markets in the world last year, not because of global interest but because local Chinese investors, using overseas passports and currency from abroad, traded avidly in hopes that reforms would push up prices.

Analysts said Monday's move was a small but significant one, heralding the eventual merger of B shares with domestic A shares, the creation of Western style mutual funds and the gradual opening of the huge domestic A share market to non-Chinese investors.

"The commission noted that opening the B share market to domestic investors will help promote the internationalization of China's capital market," Xinhua said.

Chinese investors have welcomed the CSRC announcement. "All shares should have the same rights," said Li, a local investor and full-time driver in his late 40s.

"It's troublesome to have to go through a foreign country to get into B shares."

B shares expected to rocket

Hong Kong's Hang Seng market

Analysts expect B shares to skyrocket when trading begins again next Monday, narrowing their hefty discount to A shares.

"The Shanghai index is likely to touch the 100 mark in the near term upon this move. It helps pave the way for the merger with A shares and the price gap between the two will narrow," said John Lu, ING Barings' chief representative in Shanghai.

The Shanghai and Shenzhen exchanges halted B share trade on Monday afternoon for the rest of the week ahead of the announcement, but not before rumors of the reform started spreading through the market, brokers said.

The speculation revived sentiment shaken by a broad official crackdown on price manipulation, and Shanghai B shares surged 3.57 percent to 83.201 while Shenzhen B shares rose 1.75 percent to 127.72 in morning trade.

In the afternoon, investors snapped up A shares in companies which also have issued B shares.

In Shanghai, such firms claimed eight of the top 10 movers list, with three shooting up their daily limit of 10 percent and the rest up more than 6 percent.

The Shanghai A share index ended up 1.29 percent, while the Shenzhen index rose 0.96 percent. Volume remained low.

Shares of Hong Kong-listed firms incorporated in China also jumped more than 5 percent.

Claims of price fixing

The CSRC announcement offers a timely boost to the market, which has been sliding steadily since regulators launched a probe into dozens of brokerage branches, banks and institutions in December over alleged price manipulation in two high-tech stocks.

"Many banks and state owned enterprises are planning initial public offerings this year. The market needs to be good for these listings to take place," said Elaine Wu, analyst at China Southern Securities.

By Friday, the crackdown had wiped out $32 billion in market capitalization since the start of 2001, dried up liquidity and driven down the indices.

But global investors are expected to tread with caution as the probe into price fixing by funds, securities houses and other institutions had highlighted the fundamental problems in the Chinese markets, analysts said. "I don't think foreign investors are going to blindly follow into a market that's been ramped up by local speculation," said an analyst with a European fund manager.

"There will still be companies with bigger market caps and more transparency here in Hong Kong," she said.

Analysts said foreign exchange curbs would still hinder a merger of A and B shares; a move that regulators have said would be driven by market forces. "Allowing local investors to buy B shares will help boost prices to A share levels, but the major foreign exchange barrier to a merger still has to be solved," said Tony Yam, research manager at Shanghai Orient-Sun International Investment Management Ltd.

Until the yuan became more freely convertible, a merger was unlikely, he said.

Reuters contributed to this report.

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