Merger hopes spark sharp rise in B shares

China's foreign currency-denominated B shares rose strongly yesterday to their highest levels in four months on renewed hopes that they would be merged with the larger yuan-denominated A shares.

The Shanghai B-Share Index rose 7.8 per cent to 171.84 points while the Shenzhen B-Share Index gained 7.06 per cent to close at 492.719 points. The Shanghai-Shenzhen 300 Index, which tracks A shares, recovered from an early loss to close 1.95 per cent higher at 2,316.04 points.

'The B-share market, with a much smaller size, can be easily pushed up when new money flows in,' said Julia Zhao, an executive director with Guotai Junan Securities. 'Also, it makes sense for investors to expect a merger with the A-share market this year, as the B-share market is the only remaining historical problem in the domestic market.'

A merger between the two markets might benefit B shares, as most of them are trading at a discount to their corresponding A shares. There are 86 companies trading in both markets while 23 only have a B-share listing.

Ms Zhao said that many of the firms that only had B shares, especially those in Shanghai, could become acquisition targets, giving potential gains to their shareholders.

On September 18, the B-share markets had their biggest gains in almost three years, with the Shanghai index rising 9.7 per cent and the Shenzhen index gaining 8 per cent, as investors bet that a merger would happen soon so they could take a quick profit.

The B-share markets, denominated in US dollars in Shanghai and Hong Kong dollars in Shenzhen, were set up in 1992 to attract foreign capital. With the A-share market's gradual opening to foreign investors, the B-share market has become less relevant and has long speculated that it would merge with the A-share market.

The market capitalisation of the B-share market accounts for less than 1 per cent of the A-share market's capitalisation.

Some market watchers also said the B-share market gain yesterday was partly because investors regarded it as a refuge amid a weakened A-share market.

Last week, the A-share market, which is largely driven by a few key stocks especially financial firms, suffered the biggest drop in five years as investors fretted over further government measures to curb the rally.