Hong Kong-based firms with business interests in the mainland are expected to tap China's A-share market. This follows the China Securities Regulatory Commission (CSRC) announcement this week allowing local investors to buy B shares, once reserved for foreign investors only. Analysts suggest that there will be no rush to list on mainland exchanges, but SAR-based companies will look north of the border in the next two to three years as the yuan becomes more freely convertible. 'I think this will help some companies to raise funds, particularly compared to going to the US market,' said Kenny Tang Sing-hing, associate director at Tung Tai Securities. Mr Tang said 'it is not surprising that Hong Kong companies would look towards the mainland' to raise funds. An analyst with a European securities firm said: 'I think if companies can go to the United States to raise funds, they can do it in China, which has a huge number of investors.' However, he said it would depend on the situation of companies. BNP Paribas Peregrine said on Friday that Hong Kong's capital-raising capability could come under pressure after the opening of the B-share market. Francis Leung Pak-to, the newly appointed vice-chairman of BNP Paribas, said if the B-share market could further develop, some companies might choose to issue B shares instead of H shares in Hong Kong. 'The B-share market will become an important market in China because its liquidity will improve,' Mr Leung said. Recently, CSRC chairman Zhou Xiaochuan was quoted in reports confirming that the commission was studying the possibility of allowing Hong Kong public companies with major mainland business operations to submit secondary initial public offerings in the A-share market. Even Kwong Ki-chi, chief executive of the Hong Kong Exchanges and Clearing (HKEx), said a second initial public offering would comply with CSRC rules. HKEx has no restrictions on publicly listed SAR firms raising funds in the mainland. In a move showing a resolve to streamline the markets, the CSRC said yesterday that Chinese firms which posted losses for three or more years would be given six to 12 months to turn around or face delisting. Reuters quoted the CSRC as saying that the firms, subject to trading curbs under existing regulations, would be stripped of their stock listings after the grace period if they failed to shape up. 'This move is essential for a well-regulated stock market,' said a CSRC official, quoted by state media. 'Despite steps regulators have taken to alert investors of risks, the stock market is still rife with stir frying [speculation] on rumours of restructuring or a turnaround, and blue chips are ignored.' Regulators are targeting roughly 60 firms that have become some of the most volatile counters on the Shanghai and Shenzhen bourses. Meanwhile, analysts forecast that China-related shares listed in Hong Kong are expected to gain favour this week after Beijing's move to officially allow domestic participation in the B-share markets, which have failed to draw foreign investors. H shares and red chips soared in Hong Kong on Friday after a volatile week in which B-share trading was suspended in Shanghai and Shenzhen. Value Partners chief investment officer Cheah Cheng Hye said H shares were trading at a 90 per cent discount in Asia, against 75 per cent for B shares. '[The move] will bring attention to the fact that H shares are the cheapest way to buy into China assets,' he said. Investors would not be able to arbitrage H-share gains against A shares as they were of a different class, but he expected a spill over into the H-share market from domestic investors restricted in B-share activities due to foreign exchange controls in China. Celestial Asia Securities research chief Herbert Lau Chung-kwan said foreign investors would prefer to put their money in Hong Kong markets which were perceived as more efficient than their B-share counterparts. He said a significant rise in B shares could trigger a re-rating in the H-share sector. Foreigners are expected to take profits when B shares resume trade on Wednesday as domestic investors fuel an explosion in the counters. 'Foreign interest [in B shares] will remain pathetic,' Mr Cheah said. 'The main pool of investment funds will come from the Chinese . . . In the short-term, foreigners will use the opportunity to sell off their B shares.' The decision to open up trade in stocks technically reserved for foreigners is a CSRC realisation that the market has been dominated by domestic investors exploiting legal loopholes. B shares are traded in Hong Kong dollars in Shenzhen and United States dollars in Shanghai. The B-share market, with a capitalisation of US$7 billion, pales in comparison to its A-share counterpart valued at US$550 billion. Prior to the halt of trade on Monday, the average daily turnover in Shanghai and Shenzhen was a mere US$10 million to US$15 million each. Many counters are also perceived as lower in quality. Analysts said yesterday delistings would improve the health of the markets and encourage management of other firms to improve corporate responsibility. Despite having the power to delist firms with three years of losses, regulators had never taken the step, partly because the rules were murky and there was no specific timeline for the grace period - until now. Under the new rules, eight firms which have posted three years of losses are already on the chopping block. These companies, now under curbs known as PT that allow them to trade only on Fridays, would be given six months to turn around. Talking of CSRC rules, Shenyin Wanguo Securities research director Philip Chan said 80 per cent of B shares were not of institutional grade. A surge in the market would be led by retail investors and day traders, who would take advantage of price differences between A and B shares to arbitrage. 'Specialist China fund managers who are still active in B shares will probably buy more or try to trade up B shares. If they are in and committed, they will buy,' he said. 'But if they are not committed to staying in the market, they will be selling down. If B-share valuations rise too much then they are not justifiable on a fundamental basis.' Peter Wong, chief executive and group managing director of Tai Fook Securities, said B shares had been overshadowed for the past couple of years by H shares. He said the CSRC had not been actively promoting B shares. B-share ruling, Page 8 Graphic: PERF25gwz