* Zhejiang Southeast Electric Power to convert B shares to A
shares - sources
* Will necessitate decision on how to handle foreign owners
of B shares
* Policy could allow for conversion of other B shares to A
* Announcement likely before Feb. 9 - company source
By David Lin and Pete Sweeney
SHANGHAI, Jan 28 A Chinese company is preparing
to move its dollar-denominated B shares to the mainstream
A-share board, sources at banks advising on the deal told
Reuters, the beginning of a potential migration that could see
individual foreign investors owning yuan-denominated shares in
Chinese equities for the first time.
An exodus of companies attempting to escape China's moribund
B-share market to the larger domestic A-share board offers a
potential loophole for foreign individual investors attempting
to get their hands on Chinese equities.
It also highlights the uncertainty surrounding the
sustainability of a rally on the B-share index that has
seen it surge nearly 30 percent since late November.
A source at China International Capital Corporation (CICC)
and another source at Morgan Stanley's Chinese joint
venture, Morgan Stanley Hua Xin, said that Zhejiang Southeast
Electric Power Co is planning to convert its B
shares in Shanghai into A shares.
A shares are only open to mainland investors and on a highly
restricted basis to qualified foreign institutions such as banks
or funds, which must apply for investment quotas.
The foreign-currency denominated B-share market was
originally created specifically to allow foreigners to buy
shares in Chinese companies, but it lost popularity after
regulators began letting Chinese companies access foreign
capital directly by listing in Hong Kong and New York.
"We are paying close attention to the plan to move B shares
to A shares, because it may serve as a model for other pure-B
share companies," said Cao Xuefeng, an analyst at Huaxi
Securities. "The plan, when announced, should shed some light on
A source from Zhejiang Southeast Electric Power declined to
confirm it is planning to migrate its shares, but said he
expects the firm will make an announcement before the Chinese
Spring Festival, which begins on Feb. 9.
If the plan is approved by the China Securities Regulatory
Commission (CSRC), it would require regulators to decide how to
handle the foreigners currently allowed to buy and sell the
company's B shares. Foreign individuals are not permitted to
directly trade on China's yuan-denominated A share market.
Technically speaking, allowing foreign owners of B shares to
hold A shares could also constitute an additional opening of
China's capital account.
Ironically, the recent enthusiasm for B shares is due to
policy moves to wind down the B-share market.
The CSRC set off a panic in mid-2012 when it raised the
standards for maintaining B-share listings, leading many
investors to bail out, fearing a wave of delistings.
But no such purge occurred, and instead regulators began
signalling they might cast a favourable eye on applications from
qualified companies to move their listings.
When two firms - China Marine Shipping Containers and China
Vanke - received approval to move their B
shares to Hong Kong, and Chinese investors - ordinarily banned
from trading in overseas shares - were given the option to swap
their B shares for new H shares, the B-share index surged as
investors rushed to bet on the next wave of migrating tickers.
HONG KONG OR BUST?
However, analysts are now considering whether at current
valuations, the B shares still represent bargains or have become
If most B-share companies are allowed to migrate, either by
cashing out shareholders at a premium or converting them into A
shares, the B-share rally could be sustained.
But if policymakers only allow a few select firms to abandon
the B-share market for warmer climes, leaving the smaller,
weaker tickers behind to sink, the rally could be short-lived.
Analysts say most of the companies currently on the B-share
do not meet Hong Kong listing standards, so how China handles
the other companies is critical for the future of the rally.
Sources at CSRC did not respond to emailed requests for
"Smaller companies may want to switch their B shares to the
A-share market because they may fetch a higher valuation there
compared to Hong Kong," said Zhong Hua, a Shanghai-based
strategist with Guotai Junan Securities.
"But it remains to be seen if CSRC will make a special
dispension in these cases given the current freeze on new IPO