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B shares in spotlight

By Zhang Ran (China Daily)
Updated: 2007-05-10 08:53

Excessive money inflow into the Shanghai and Shenzhen stock markets is driving a surge of China's long-neglected B shares, the foreign-currency denominated shares on the mainland market.

The Shanghai B-Share Index surged 6.9 percent yesterday to close at 269.997 points, after rising 9.3 percent on Tuesday. The Shenzhen B-Share Index also jumped 4.8 percent to 713.527 points.

For the second day in a row, both indexes reached their highest points since the market opened in 1992.

On May 8, the first trading day after the holiday, 16,632 new accounts to buy B shares were opened, almost three times the amount opened on the last trading day in April, according to statistics from China Securities Depositary and Clearing Co Ltd. By May 8, the total number of B share accounts reached 1.75 million.

Investors are concerned yuan-denominated A shares might reach their valuation ceiling after skyrocketing growth since February. According to Shanghai-based Shenyin Wanguo Securities, the valuation gap between A and B shares is growing. The average A share price-to-earnings ratio is 40 times, and 30 times for B shares.

"The overall valuation of A shares is quite high, meaning more risk. B shares are comparatively safer and may be able to catch A shares in price," Zhang Qi, an analyst with Haitong Securities said.

Long-awaited B-share reform also helps generate investor interest in B shares. Increasingly, investors speculate that B shares merge with A shares or H shares after the securities reform is finished this year.

But Li Yongsen, a professor with Renmin University of China said the merger between B shares and A or H shares is still a while in the making.

"Under China's current foreign exchange policy, which forbids the free exchange between renminbi and foreign capital for investment purpose, it is hard to design a suitable way for B shares to be merged with A shares or with H shares," Li said.

"The revival of the mainland stock market thanks to the securities reform and the continuous inflow of new money is the fundamental reason to boost B shares currently, though the speculation of the merger between A shares and B shares might contribute," Li added.

China first launched B shares in Shanghai in 1992 in a bid to draw foreign capital.