China has bowed to reality by allowing local investors to invest legally in the B-share markets, originally designed for foreigners. At the same time, it has taken a major step that is probably a prelude to a long anticipated merger of the A and B-share markets. For years, Beijing looked the other way while domestic investors had become the main force behind the trading of foreign currency B shares listed on the Shanghai and Shenzhen exchanges. Poor transparency, inept corporate management and mediocre results at listed B-share companies have chased foreigners away from the markets, leaving Chinese regulators with no alternative to some form of acceptance of a role for local investors. But in a brief statement on national television yesterday, Beijing confirmed that it was finally clearing away the main legal obstacles to B-share purchases by local investors. It added the move was being made because of the improvements in the nation's foreign exchange position. The statement gave no details, saying only that the market would be closed for the entire week while the regulations were finalised. B-share trading, halted for the afternoon ahead of the announcement, would not resume this week. While the significance of the move will depend on the details still to be worked out, it appears that foreign exchange in special accounts at the nation's banks - and not cash - will be acceptable for B-share purchases. This will give regulators some control over the extent of the movement of funds into the stock market. The measure, which has been debated for years, will still add a considerable amount of liquidity to the market, which has seen disappointing growth in turnover and capitalisation. 'This still is positive news,' said a Shanghai fund manager, expressing a view echoed by traders and brokers alike. Others saw the significance mainly in the direction it would take the markets. 'It is a first step towards a merger of the A and B-share markets,' said an executive at Kaifeng Securities. China's securities regulators do not like to talk of a merger, preferring to describe the ultimate fate of B shares as determined by market measures rather than administrative means. They say that over time, B-share companies would be allowed to buy back their foreign-currency stock and then issue new domestic currency A shares to replace it. The reason for their sensitivity on this point is that investors have been burned so many times by policy changes in the mainland that regulators like to emphasise their reliance on market mechanisms. The ultimate result, however it is described, is that the B-share market eventually will be folded into the much larger A-share market. Making this possible is the eventual entry of foreign investors into the A-share market through the introduction of a qualified foreign-investor scheme, something that has been used successfully in Taiwan. Foreign and domestic securities houses have also taken the first steps towards setting up jointly run investment funds that will eventually be able to invest in A shares. Despite the widespread expectation of such a move, the sudden halt to trading and the announcement yesterday came as a surprise to many investors. Road to access Dec 2000: Beijing allows foreign founding partners of B-share companies to freely trade their shares. June 1999: CSRC announces a cut in the stamp duty for B shares. June 1996: CSRC bars mainlanders from opening new accounts to trade in B shares. October 1995, a B-share central clearing system becomes operational in Shenzhen. June 1994: Beijing establishes framework to allow legal-persons shares to convert B shares. June 1993, the Shenzhen and Shanghai stock exchanges jointly launch the China Stock Index, including the China B-share index. January 1992, Shanghai Vacuum Electronics Devices becomes the first company to publicly offer B shares.