Investors rush China's B share markets

Millions of Chinese residents, like these in Shanghai, are avid share market investors.

By From staff and wire reports

HONG KONG, China (CNN) -- Investors in China have savored their first taste of hard currency share trading, propelling China's two B share markets to sharp gains.

The Hong Kong dollar-denominated Shenzhen B share market soared 9.69 percent early Wednesday, while Shanghai's U.S. dollar denominated B share market was up 9.73 percent, as new traders poured into the markets.

The buying marked the first trade since Beijing gave Chinese residents with legal foreign exchange accounts the right to buy B shares. It is thought that as much as $75 billion in hard currency is held in China's banks.

Analysts expect a sustained rally of 30 to 50 percent over the next few days as investors gobble up B shares, attracted by their cheaper valuation relative to domestic A shares.

Both B markets near their trading limits

However, the B share markets are restricted from moving more than 10 percent in one day, meaning any rise will be incremental over several trading sessions.

Analyst Frederick Tsang says the next inevitable step is a merger of China's A and B share markets.

"This is a great moment for China's investment system, and particularly good for Chinese companies looking to raise hard currency funds to invest in their domestic expansion," said China Everbright Research director of research Frederick Tsang.

Tsang says the amount of hard currency held by Chinese residents is up to 12 times the capitalization of the B share markets. "It is likely that a huge amount of funds will flow into the B shares over the next couple of days," he says.

The opening of the B share markets coincides with China's push for inclusion in the World Trade Organization. Analysts say the move will make the Chinese investment landscape more liquid, and therefore less vulnerable to manipulation.

"The merger of the A and B markets is the next inevitable step"

"The merger of the A and B markets is the next inevitable step, but that probably won't happen until the renmimbi (yuan) is allowed to be traded on the open market, which is likely a few years down the track," says Tsang.

Tsang says another benefit of the push to open up China's equity markets is that it will allow domestic companies to raise hard currency with which to buy foreign equipment.

"Those companies will now be able to use the B market to raise foreign currency to buy machinery from offshore suppliers," he says.

The opening of the B share markets to domestic Chinese investors comes as more Chinese companies turn to international markets to raise more expansion capital.

CNOOC Ltd makes a strong debut

One such group, the petroleum giant CNOOC Ltd, listed American Depository receipts on the New York Stock Exchange for the first time after a $1.26 billion public share sale.

The shares rose 4.6 percent to $16.20, compared with the issue price of $15.40. In Hong Kong on Wednesday the shares debuted strongly, rising 5.9 percent from their issue price in Hong Kong of $HK5.95 a share.

Both B share markets were suspended from trade on February 19 to give regulators time to prepare for the expected influx of funds. Early trading volumes on both markets was light, as expected, because few traders were willing to sell out of the markets at such an early stage.

Police and securities regulators are out in force Wednesday as China allows domestic residents for the first time to trade in hard-currency B shares at the Shanghai and Shenzhen stock exchanges.

Interest in the B share markets has been fanned by the heavy discounts at which B shares trade compared with A share markets. Previously, Chinese residents were only allowed to trade A shares, which are denominated in yuan.

Thousands flooding to the B markets

The Shanghai Securities News reports that this week a record 126,775 new B-share trading accounts were opened by residents at the Shanghai and Shenzhen bourses, enlarging the number of B-share accounts in the mainland by about half.

At the end of last year, there were 258,400 B-share trading accounts nationwide.

Authorities are said to have mobilized a strong police presence to avoid a repeat of the chaos seen in Shenzhen in 1992 when riots broke out among investors after they were unable to secure applications to buy stocks.

Reuters contributed to this report.

China Everbright Research Ltd.
WTO
Shanghai Stock Exchange
Shenzhen Stock Exchange

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