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China B Shares to Rally on Possible A-Share Merger, CICC Says

China’s foreign-currency denominated shares may extend gains on speculation they will be merged with local-currency stocks ahead of the likely introduction of an international board, said China International Capital Corp.

The Shanghai SE B Share Index, comprising B shares which are traded in U.S. dollars and restricted to overseas investors, has climbed 31 percent in the past 12 months, compared with a 7.4 percent loss for the Shanghai SE A Share Index. China may allow foreign companies to sell stock in Shanghai next year, Fang Xinghai, director general of Shanghai’s financial services office, said July 8.

“With a potential introduction of an international board in Shanghai later this year as well as future RMB appreciation, we believe the valuation discrepancy between A-shares and B- shares will eventually vanish,” Hao Hong, CICC’s Beijing-based global equity strategist, wrote in a report. “B shares may merge into A shares. If that’s the case, you will get a currency gain and a valuation gain. That’s fantastic.”

The Shanghai B share index is trading at a 40 percent discount to the A share counterpart, Hao said, citing his own data.

The yuan has gained 0.4 percent against the dollar since China’s central bank said on June 19 that it was resuming a flexible exchange rate to curb inflation and rebalance the economy away from exports

Inner Mongolia Yitai Coal Co., a coal producer, has jumped 32 percent this year, the most among the 53 companies listed in the B-Share Index. The A-Share Index has 858 listed companies. HSBC Holdings Plc and London Stock Exchange Group Plc are among companies that have expressed interest in a Shanghai listing when China opens the world’s largest market for stock sales to foreign firms.

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