CHINA'S long-suffering Class B shares, denominated in foreign currencies and created to allow access to offshore investors, is springing back to life on expectations that the shares will rise in value if they are converted to Hong Kong-listed shares.

The Shanghai's B-share index, denominated in US dollars, rose on January 8 for the 15th straight trading day, the longest winning stretch since its launch in 1992, before receding amid profit-taking. The index has risen 18 percent since the beginning of December to close at 254.02 on Friday. The Shenzhen's B-share index, denominated in Hong Kong dollars, surged 22 percent over the same period. In comparison, the benchmark Shanghai Composite Index has increased 13.4 percent since December 1.

The comeback occurred after Shenzhen-listed China International Marine Containers, the country's top ship container maker, became the first company to revive its sluggish B shares by transferring them to an H-shares listing on the Hong Kong Stock Exchange.

H shares are a class of shares in Hong Kong reserved for Chinese-incorporated companies. They are denominated in Hong Kong dollars and trade the same as other equities on the Honk Kong exchange.

Laxing thresholds

The shares of International Marine Containers advanced 17 percent since December 19, when they began trading as H shares. The surge has led to speculation that other companies with B shares may follow suit.

That prospect was heightened after the China Securities Regulatory Commission released new guidelines on December 20, relaxing the thresholds for Chinese companies applying for offshore listings. The guidelines went into effect on January 1.

That means Chinese companies applying for an overseas listing are no longer required to have net assets of at least 400 million yuan (US$64.5 billion), a fund-raising size of not less than US$50 million and a minimum of 60 million yuan in annual net profit.

"The reform of the mainland's capital markets and the relaxation of the overseas listing requirements will fuel the prevalent trend of the conversion of B-share companies into H shares," said Edward Au, co-leader of the National Public Offering Group of Deloitte China. "About 40 B-share companies that can meet Hong Kong Stock Exchange's listing requirements are likely to be the potential candidates for conversion," Au added.

The Chinese B-share markets were set up in the early 1990s to offer domestic companies a channel to attract foreign investments while giving overseas investors limited access to the country's capital market.

Although some foreign investors dabbled in B-share trading at the start, interest quickly waned as Chinese mainland companies flocked to the Hong Kong stock market to tap overseas funding sources.

Only 107 companies - few of them truly blue chip - are listed on China's B-share boards, with total market capitalization of 167 billion yuan. That is a mere 0.86 percent of A-share capitalization, data from the China Securities Regulatory Commission showed. Moreover, there hasn't been a new B-share listing since 2000.

Simply put, the financing function of the B-share market has grown moribund. Funds raised from the B-share board stood at HK$20.6 billion yuan (US$2.7 billion) during 2003 to 2011, representing 0.5 percent of the total financing of the yuan-denominated A-share market over the same period, the CSRC said.

In fact, the B-share market has been dominated by domestic investors since regulators allowed Chinese individuals to trade B-shares in 2001 to boost trading. Foreign investors, as they were slowly allowed institutional access to China's markets, have preferred the larger and liquid A-share markets. The Qualified Foreign Institutional Investor program launched in 2003 opened the doors to offshore investment in A-shares, and that channel is steadily being expanded.

Now it seems, Chinese regulators may be willing to see the obsolete B-share market phased out, amid discussions of creating mechanisms to merge B shares with A shares or even to require listed firms to buy back their B shares.

Some B shares are on the verge of being kicked off the Shanghai and Shenzhen exchanges. Under new rules implemented last year, a company with only B shares will be delisted if it closes below its book value for 20 consecutive trading days. The successful conversion of B shares to H shares by container manufacturer CIMC pointed other troubled B-share companies to an escape hatch.

Better solution

"Because B-shares are traded in foreign currencies, it is difficult to merge them with A shares before the yuan becomes fully convertible," said Qian Xiangjin, an analyst with Citic Securities. "The B-to-H method provides a better solution in terms of the foreign-exchange issue."

In case of CIMC, the company offered two options for its B-share holders. Shareholders could either sell their B shares at the last traded price plus a 5 percent premium, or they could hold H shares equivalent to the amount of their B shares.

For Shanghai-listed B-shares, the conversion would not be complicated because the Hong Kong dollar is pegged to the US dollar.

Meanwhile, analysts said B shares are likely to show a considerable premium after converting to H shares because they are undervalued due to relatively illiquid trading.

"The B-share sector is traded at the cheapest level, compared with A-share and H-share markets," said Yin Zhongli, a researcher with the Institute of Finance and Banking at the China Academy of Social Sciences.

According to Yin's calculation, B shares are traded at a discount of about 50 percent to their corresponding A shares, while the premium H shares over A shares is between 10 percent and 25 percent.

"Theoretically, the combined valuation of China's B shares would more than double if they all were converted into H shares," Yin said.

CIMC's H-shares opened at HK$12.60 on their trading debut in Hong Kong, a premium of 30 percent to their last B-share traded price.

Financing source

The conversion of B shares into H shares would also benefit companies with an overseas financing source, while burnishing their international profile and helping them to expand their business globally, Galaxy Securities Research said in a report.

China Vanke Co, the country's biggest developer and a company eager to expand internationally, is expected to be the next major B-share counter to follow CIMC to Hong Kong. Vanke suspended trading in both its A-shares and B-shares on December 26.

"This is a long-waited move," Credit Suisse said in a report. "The process accelerated after CIMC successfully transferred its B shares into H shares."

However, market experts said such a conversion wouldn't be suitable for all B-share companies.

"The method of converting the shares is more applicable to companies with international businesses that can generate income in foreign currencies and to companies whose shareholders are mainly foreign investors," said Song Guoliang, director of Finance and Investment Research at the University of International Business and Economics.

For B-share companies that mostly operate domestically and whose investors are mostly mainlanders - and that covers 60 percent to 70 percent of all B-share companies - it might be better to buy back their B stocks or merge B shares with A shares, according to Song.

"Anyway, there is no universal solution to the B-share dilemma, and different methods should be employed according to specific conditions," Song said.