Market merger talk lifts B shares

The mainland's foreign-currency B shares surged yesterday on speculation that Beijing would merge the moribund market into an international board next year.

The Shanghai B-share Index jumped 12.3 points or 5.1 per cent to 254.8, the highest close since April 27. It was also the biggest daily gain in more than nine months.

The Shenzhen B-share Index climbed 21.1 points or 3.2 per cent to 678.1, the highest close this year.

However, any rally on the hard-currency equity market may be shortlived and it was unlikely reform would materialise anytime soon, analysts predicted.

The speculation has placed China Securities Regulatory Commission chairman Shang Fulin, who has successfully directed a series of liberalisations, in the spotlight again.

China International Capital Corp said in a recent report that B shares could be merged into an international board that would be home to foreign companies listed on the Shanghai Stock Exchange.

The mainland has yet to launch the international board but it is expected that the first overseas company listing will occur next year.

Yesterday, all B shares rose on the Shanghai and Shenzhen exchanges amid buying euphoria.

The nearly 100 B-share companies now trade at about 50 per cent discount to their A-share counterparts.

'The rally could turn out to be short-lived as volatility in the tiny market could occur once the regulator comes out to deny the speculation,' Haitong Securities analyst Zhang Qi said. 'It gave chairman Shang a reminder that there is still one thorny legacy issue left to be solved by him.'

Beijing created the B-share market in 1992 to help some state-owned firms raise foreign currency for expansion. A lack of liquidity has prompted the regulators to consider bailing out the market several times over the past decade. All those moves failed.

Before 2001, only foreign institutions and investors were allowed to trade B shares.

Beijing allowed mainland residents to use their foreign currencies to buy B shares in 2001. But the buying spree by mainland investors created an easy exit for foreign funds amid a boom-to-bust scenario.

Not a single initial public offering has been launched on the B-share market in the past nine years.

Since Shang took the helm of the CSRC in 2002, he has been credited with efforts to overhaul the market.

The share structural reform that made all mainland-listed shares free-floating has won him accolades from the investment community.

He has strongly advocated further liberalisation on the volatile market, launching derivatives such as index futures and margin trading.

Last year, the mainland created its own Nasdaq-style second board at the Shenzhen bourse after more than a decade of preparations.

'The rally could be read as investors' high hopes on Shang, believing the capable chief regulator could step into the B-share market and fix it,' Citic Securities analyst Sun Chao said. 'Technically, a merger between A- and B-share markets should prove easier than the share structural reform.'

The Shanghai Composite Index, the benchmark that mainly covers A shares, has lost 19.1 per cent this year, one of the world's worst-performing indicators. The Shanghai B-share index advanced 1 per cent from the close of last year.