Nov. 13 (Bloomberg) -- China’s dollar-denominated stocks surged the most in 14 months after regulators made it easier to exchange foreign currencies, fueling expectations more people will convert their yuan to buy the cheaper so-called B-shares.

The Shanghai B-Share Stock Price Index jumped 9.4 percent to 251.19 at the close, the biggest advance since Sept. 19, 2008. The Shenzhen B-Share Stock Price Index climbed 7.9 percent, also the most in 14 months. B shares are traded in foreign currencies while A shares are denominated in yuan.

“That will probably lead to more demand for foreign currencies available for potential investment,” said Zhang Qi, an analyst at Haitong Securities Co. in Shanghai. “B shares are a good bet for those who hold dollars and want to benefit from China’s fast economic recovery.”

China will expand trials for providing foreign currency exchanges for individuals, the State Administration of Foreign Exchange said Nov. 11. Individuals are allowed to exchange as much as $5,000 a day. The government will now allow non- financial institutions to provide exchange services, it said.

The government also limits individuals to $50,000 a year in foreign exchange conversions.

“It isn’t that the government has increased the amount of foreign currencies individuals can purchase,” said Guo Zhaoyang, a foreign-exchange strategist at China Everbright Bank Co. in Guangzhou. “It’s just you can exchange currencies at more places across the country. I think the market has over- reacted.”

Discount

China’s B shares, which can only be bought and sold by domestic individuals and overseas investors, are traded in U.S. dollars in Shanghai and Hong Kong dollars in Shenzhen. Domestic institutional investors are barred from buying these stocks.

The shares traded at an average discount of 49 percent to their A-share listings, Erwin Sanft, head of China and Hong Kong equities at BNP Paribas, said in a note this week.

The CSI 300 index, which tracks yuan-denominated shares in Shanghai and Shenzhen exchanges, rose 0.5 percent to 3,518.72, after falling as much as 1.6 percent earlier.

Huangshi Dongbei Electrical Appliance Co., a manufacturer of refrigerator compressors, jumped the 10 percent daily limit to 67.9 U.S. cents. Shanghai Diesel Engine Co. surged 10 percent to 74.9 U.S. cents.

Expectations that the Chinese government will resume the yuan’s appreciation have also boosted B shares. An appreciation of the yuan versus the dollar would boost the value of the B- shares, as measured by the assets per share, because they are denominated in U.S. dollars and company assets are denominated in yuan.

China’s central bank said Nov. 11 foreign-exchange policy will take into account global capital flows and changes in major currencies, prompting speculation it will allow the currency to strengthen as the dollar weakens.

Policy makers will improve the setting of the yuan’s rate in a “proactive, controlled and gradual manner and based on international capital flows and movements in major currencies,” the People’s Bank of China said in a quarterly report.

--Zhang Shidong. With assistance from Belinda Cao in Beijing. Editors: Linus Chua, Reinie Booysen

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at +86-21-6104-7014 or szhang5@bloomberg.net

Last Updated: November 13, 2009 05:05 EST