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Beijing opens Class-B shares to local Chinese investors
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From The Asian Wall Street Journal Feb 20
Beijing--China's stock regulators have freed local Chinese to buy foreign-currency denominated shares, in a step aimed at boosting share prices and the economy.
The move further blurs hazy lines between domestic and foreign types of equity and could pave the way for combining them. Such a merger would open one of the world's biggest stock markets to foreign investors. Monday's announcement, however, represented only modest progress in that direction. Chinese nationals already account for about 80% of trading volume in the small, foreign-currency Class-B share market, thanks to regulatory loopholes that are commonly exploited.
In a televised announcement, the China Securities Regulatory Commission lifted the official ban. It gave no timetable for allowing overseas investors to buy the country's local-currency Class-A shares, which are restricted to Chinese citizens. The broadcast said the market regulator would release more details later.
The announcement followed suspension of trading earlier in the day of Class-B shares, but gave no date for resumption of trade. When trading resumes, the news is expected to jolt the market upward. Some traders predicted 50% to 100% gains for Class-B shares now that domestic buying restrictions have been lifted. “It will bring in more capital and boost liquidity,” said Chen Zhe, an analyst at Citic Securities. “It's also a big trial for China to internationalize its capital markets.”
That would make it easier for Chinese companies to access foreign cash locally. Because of the small size of China's B-share markets, most of the country's big companies head overseas to raise foreign capital. The overseas route ignores the huge hard-currency cache at home. There is now about $75 billion in foreign-currency bank deposits held by individuals, some of which Beijing would like to send toward Class-B shares. In recent months, the government has worried less about an outflow of foreign currency from its banks, and more about how to bolster cash-starved companies and revive consumption.
“From every angle it's a good move,” said Fang Xinghai, a senior executive at Beijing-based Galaxy Securities. “Even if the (yuan) depreciates on the black market, that would help exports.”
China's currency restrictions -- the yuan isn't freely convertible -- were a primary reason for the government to create two classes of equity when the stock markets were established in the early 1990s. But while Chinese nationals have piled into Class-A shares, overseas interest in Class-B shares has dwindled amid a meager selection of companies and regulatory zigzags. As a result, China's Class-A shares now carry total market capitalization of about $550 billion, while the Class-B share total is about $7 billion. Share prices also are wildly divergent, even for companies that list both types of equity.
Analysts predicted that Monday's announcement will start to balance things out. It could also help reverse a recent sell-off prompted by an anticipated crackdown in trading irregularities, they said. “Once the domestic investors are allowed to enter the B-share markets, part of the capital from A-share markets will flood into B shares,” said Li Yue, a researcher of Renmin University in Beijing. “We can believe that investors will be more confident about the entire securities market.”
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