On Wednesday the Shanghai B-share index, set up in 1999 for foreign investors with a base value of 100, reached 332 points compared to a low of 186.229 points in 2003. The index has put on over 140 points since the beginning of this year.
ôItÆs the old story," says one fund manager in Shanghai. "Investors holding B-shares are banking on that share class being merged with A-shares. Given the traditional discount B-shares have traded at compared to A-shares, the hope is that a merger will result in valuations meeting half-way.ö
Stephen Green, Standard CharteredÆs China economist, says: "Buying cheap B-shares which are to be converted into A-shares later is like buying A-shares at a discount.ö
This dream has underpinned many a punterÆs stock investments in China, driven by the plethora of share classes, comprising G-shares (formerly non-tradable shares) A-shares (tradable shares), B-shares (US and HK dollar-denominated shares).
ôHistorically, all these share classes have behaved differently. It would be more rational to have one share class, and China is moving towards that. ThatÆs what is feeding the rally,ö says one observer.
But ironically, it's not foreigners who are benefiting from this rally. B-shares were originally snapped up by foreign investors who were not able to get any other exposure to the Chinese stock market prior to the launch of the qualified foreign investor scheme (QFII). B-shares circumvented the governmentÆs currency controls, since foreign investors did not have to use renminbi to buy the shares. This prevented any potential impact from capital flows on the Chinese currency. However, enthusiasm quickly turned to disgust as the companies they bought proved riddled with malpractice. As liquidity in the market thinned it became more and more difficult for foreign investors to make a graceful exit.
The market got a new lease of life in 2001, however, when domestic investors were given the opportunity to buy B-shares. Driven by the same logic as today, they piled in, giving many foreign investors the opportunity to make their escape. Six years later what are now primarily domestic investors are still waiting for the merger.
But this time it could be different, say some observers. ôThe government has now almost completed the G-share reforms, a financial futures exchange is underway and there is a real feeling that the time is now ripe for the government to turn its attention to the B-share market,ö comments one specialist.
Green points out that fundamentals also underpinning investorsÆ desire to buy into the market. ôEarnings are up all across the board. The margin compression that many economists were predicting last year simply hasnÆt happened,ö he says.
But Jonathan Anderson, chief economist for UBS, warns that the performance of the B-share market responds to rumours regarding official policy about the merger.
ôSometimes the regulator hints that a merger will be on a one-to-one share basis, and the prices surge. But at other times they hint that the B-shares will be converted based on their price discount to the A-shares. At that point, they tend to tumble,ö he says.