China opens up stock markets

Chinese investors check out B-share prices at a stock-exchange hall in Shanghai

By CNN's Alex Frew McMillan

HONG KONG, China (CNN) -- Chinese stocks got a boost Friday as the last restriction was lifted for domestic investors to play their own markets.

China's B share markets were previously off limits to all but overseas investors. They were opened to local investors on February 17.

Until Friday, though, Chinese investors could invest only the money they had in existing foreign currency accounts. They are now free to plug in foreign currency from accounts opened after the February lifting.

China's markets are dominated by retail investors. So the fresh flow of money is expected to give stocks a significant long-term boost.

A two-month rally

Bank sources say foreign currency deposits in China stand at $75 billion, while the B share markets have a total of $17.5 billion invested in them.

"It's going to be a two-month rally, and the B shares will converge to the A shares," said Joe Zhang, head of China research for UBS Warburg. "Then they will both be trading very high for two to three years."

China's B shares opened with modest gains Friday morning. The Shanghai B share index rose 0.5 percent to 241.023. But it set a record high the day before, of 241.305.

The Shenzhen B share index rose 0.9 percent to 429.47. It jumped 1.5 percent right off the mark and also set a new high-water mark this week, of 445.83.

Strategists expected a muted first day of trading. Much of the money has already made its way into B shares as investors found ways to shuffle funds between accounts, they say.

Zhang predicted both markets would post gains of between 6 percent and 10 percent for the day.

Stocks on a tear in 2001

China's B shares have been on a tear in 2001, though. At a time stocks worldwide have been languishing, Shanghai is up 173 percent for the year. Shenzhen has been even more impressive, rising 221 percent.

More than 90 percent of the money invested in China is from retail, man-in-the-street investors. Those investors, who tend to speculate heavily, have bid up the A shares that they could buy.

B shares are roughly 40 percent cheaper, despite their recent gains. As a result, strategists say the B share markets will continue a bull run for several months.

"Imagine the average Joe in China," Zhang said. "His left pocket is loaded with a lot of expensive A shares. And in his right pocket he has only a little bit of B shares, much cheaper B shares. What do you think this person is going to do?"

Near term, though, the volatility of the past week will continue.

"It's not something you can predict," said Charles Cheung, head of China research for Salomon Smith Barney. B shares have been buffeted as some investors looked to lock in profits and others bet on a long-term bull run.

Investors looking elsewhere

Overseas investors have been put off stocks in China by the lack of information and reporting standards in China. They have favored similarly speculative markets in Turkey and Pakistan.

If they do invest in China, they have easier access through Hong Kong's H share and red-chip stocks. Those stocks, listed in Hong Kong but doing most of their business in China, are off-limits to Chinese investors.

Cheung noted that many B shares trade at price/earnings multiples of 50. That makes them much more expensive than Hong Kong's red chips, often at P/Es of around 20.

But China's markets will continue to storm away on their own, unlike the rest of the world, pumped by local investors.

"China will continue to run for the moment in a world where clearly the biggest concern is the extent of global demand," Cheung said. "China has domestic demand that is pumping away quite nicely."

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