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Gold rush to new stock frontier
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Yang Yunfei
WHEN Zhao Weiguang learned that domestic individual investors would finally be allowed to trade the foreign currency denominated B shares previously reserved for overseas investors, he wasted no time in opening a trading account and shifting US$10,000 from his savings into it.
"I just want to try my luck," said the 32-year-old computer technician, who works for the Shenzhen representative office of a US electronics firm.
Zhao said that he wanted to bet the money on B shares simply because the potential return was more attractive than bank savings.
China cut one-year US dollar deposit rates from 5.5 per cent to 3.8125 per cent in December in line with US cuts.
"You know, the interest rate is too low and it's meaningless to leave money in the bank," he explained.
Zhao is just one of hundreds of thousands of new investors in China who have placed their bets on the resurgent B share markets to cash in on China's latest stock market reforms.
The opening up of the B share market is the latest in a series of efforts by China to reform its financial markets in the run-up to its expected entry into the WTO this year, a move which could make the hard currency markets more attractive to foreign investors.
The move is also believed to greatly boost the liquidity of the nine-year-old, moribund markets by tapping the growing availability of foreign currency on the Chinese mainland.
China's central bank said last month that at the end of January, Chinese individuals held about US$75 billion in foreign exchange savings accounts and domestic companies and institutions held another US$55 billion in bank deposits.
With low interest rates and strict foreign exchange controls to prevent an outflow of funds, Chinese investors have few other places to park their cash other than the stock markets.
"The opening up of B shares to mass participation makes it possible for domestic investors with legal foreign exchange deposits to invest in stock markets,"said Zhu Kai, senior manager of the Treasury & Capital Markets Head Office (HK) of Bank of China.
The market deregulation has opened the door to the huge US$75 billion in personal foreign exchange deposits eligible for investment, although so far the actual inflow into the B share market was only a fraction of the total savings. State media reported that only about US$3 billion, or less than five per cent of the the nation's foreign currency savings, was channelled into the B share markets in the first 10 days after the markets were opened to Chinese investors.
"The B share market will become an important market in China as its liquidity is improving," said Wang Haibo at Guotai Jun'an Securities.
Wang predicted that more and more B shares would be issued to tap the country's huge foreign currency deposits.
Stagnant markets
China introduced hard currency B shares, denominated in US dollars in Shanghai and HK dollars in Shenzhen, to give domestic companies access to foreign capital and give foreign investors a chance to invest in China's bourses while keeping them out of the larger domestic A share markets.
However, the markets have never taken off as expected.
Foreign investors, especially large funds, have long shunned B shares due to low liquidity, high volatility and poor quality firms.
The Shanghai Securities News reported last month that foreign brokerages' trading volume of B shares in the Shanghai market dropped by more than 40 per cent year on year in 2000, despite a stunning rally that made the Shanghai's B share market the world's biggest gainer, with the B share index soaring 136.21 per cent.
The top 20 players by turnover were Chinese brokerages, while the frontrunner among foreign brokerages was Credit Lyonnais Securities (Asia) Ltd, which fell from ninth place in 1999 to 23rd last year by turnover, the newspaper said, quoting statistics from the Shanghai Stock Exchange.
These figures added credence to the widely-held belief that although B shares are technically reserved for foreign investors, in practice speculative local investors dominate the market by using overseas passports and foreign currency from abroad or the black market to skirt regulatory loopholes.
For years there has been talk of shutting the moribund markets down or merging them with the more liquid domestic A share markets, off-limits to foreign investors, as the markets have been gradually losing their capital-raising function.
The move to open up the B share markets is seen as a big step towards the eventual merger of B shares with A shares and hence the demise of the hard currency stocks.
But the signals from top market regulators so far have been mixed.
Anthony Neoh, chief advisor of the China Securities Regulatory Commission (CSRC), said last week that he saw limited development for the tiny B share markets despite the recent reform and it would be more practical to focus on the gradual opening of the bigger A share bourses to foreigners.
But CSRC Chairman Zhou Xiaochuan was quoted by State media as saying that "a merger with A shares can be five to 10 years away".
The merger is still expected, but not until China makes its local currency yuan fullly convertible on the capital account.
Analysts said that market regulators decided to open the stocks to domestic investors on expectations that the stagnant markets could be revived before the much-anticipated merger.
Big winners
Before the reform, B shares traded at a deep discount of up to 85 per cent to the domestic A shares, largely due to poor liquidity in the 114-share market with a combined capitalization of US$7.2 billion.
The reform has unleashed a wave of interest in the long dormant markets.
Eyeing the sharp price differentials between the two classes of shares, hundreds of thousands of hopeful investors have raced to open B share trading accounts. At one point, some 341,000 new investors opened accounts in just two days, nearly doubling the previous total of 280,000 accounts.
Investors are diving into the hard currency shares because they expect an eventual merger of A and B shares to lift B share prices.
The surge of liquidity from a flood of new investors has pushed B shares indices to record highs, with shares in Shenzhen and Shanghai soaring their 10 or five per cent daily limit-up five days in a row on thin volumes.
Eager latecomers gobbled up any counter they could get their hands on, ignoring warnings on the risks of the speculative markets, while long-time players were reluctant to unload shares as the price rise showed no sign of slowing.
The buying spree is expected to continue in the coming sessions, since most new punters were unable to land any shares during the week-long rally.
Analysts predicted that the B share fervour would subside only when prices have doubled or even tripled.
"It's all liquidity now," said Bank of China's Zhu. "But when the shares achieve a higher valuation, they will move quite differently. The share price would reflect fundamentals."
B shares have generally risen since February 28. Shanghai B shares have surged 53.86 per cent since then and Shenzhen shares have soared 75.59 per cent.
By Friday's close, combined capitalization of the two markets had surged from a pre-reform US$7.2 billion to a record high of US$11.7 billion. B shares were trading at a discount of around 60 per cent compared to A shares.
Now regulators only allowed investors with foreign currency deposits before February 19 to buy B shares and new bank deposits will be allowed in on June 1.
The three-month buffer period is aimed at preventing a surge in black market currency trade and protecting A share values.
"As more money will pour into the tiny B share markets after June 1, we expect further gains in the future,"said Zhu. "So get your money ready."
Actually, those newcomers to the B share markets certainly missed the rally train. The real winners in China's latest stock market reforms are those who held accounts before February 19, although many of them have had to wait years for the markets to wake up.
State media reported last week that Wang Shuxian, founder of textile exporter Chengde Dixian Textile, China's first wholly-private B share firm, was most likely to be the biggest gainer of the China's market relaxation.
Wang listed shares of his firm in Shenzhen last year and still holds more than 40 per cent of the total shares, or 85.1 million shares, a record for individual ownership of a listed firm in China.
Shares of Dixian nearly doubled over the past eight days, closing at HK$7.95 on Friday, up from HK$4.33 on February 19. Wang thus reaped enormous profits estimated at some HK$300 million from the rally.
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