B shares traded on both the Shanghai and Shenzhen stock exchanges surged yesterday on speculation they will be merged with A shares.

The B-Share Stock Price Index yesterday rose 7.19 percent to 152.676 in Shanghai and climbed 3.91 percent to 479.74 in Shenzhen. Meanwhile, A shares in Shanghai dropped 1.96 percent to 2770.11.

Since the China Securities Regulatory Commission (CSRC) finished its work making non-tradable shares tradable last year, the reform of B shares has become a hot topic.

It is widely considered that B shares will be able to catch A shares in price after the reform. The price of B shares is usually lower than A shares.

"B shares will either be totally bought back by companies themselves or directly converted into A shares, though until now, no clear official policies have been given concerning the fate of the B share," Cheng Weiqing, an analyst from CITIC Securities, told China Daily.

The long-awaited B-share reform has generated investor interest in B shares. "Investors from home and abroad both hope to make money," said Cheng.

The price rise came on speculation China may start B-share reforms soon after this Spring Festival holiday, as reported by China Economic Times on Wednesday, citing an anonymous source close to the CSRC.

According to the source, the CSRC's marketing department has already finished its draft B-share reform plan. The final scheme will be decided at a CSRC meeting held after January 20.

But this was dismissed a day later by the securities regulator as "not true".
Speculation drives price

Cheng said speculation often affected share prices, recalling two pieces of speculative news about the future of B shares last year that caused the shares to fluctuate.

"Though many investors take B-share reforms as an opportunity, nobody knows exactly when the reform will start," said Cheng.

Li Jun, 45, a long-time B-share holder, shared Cheng's view. "Holding B shares is not a bad thing, but you have to be patient and wait until the reform really comes."

The B-share market is believed to have basically lost the functions of both raising and investing money due to its small market value only around 1 percent of the A-share value the suspension of new share issues, and its tiny trading volume of about 20,000 shares per day.

Fifteen years ago, when the first B shares started trading in Shanghai, they were deemed a financial tool to attract foreign capital. But the birth of H shares and the prosperity of the so-called red chips in the early 1990s was the beginning of the end for B shares, since both were able to raise foreign capital.

B shares suffered one blow after another. In particular, the large-scale expansion of H shares to strengthen their ability to finance foreign capital for big domestic companies, and the suspension of new share issues in July 2004.

The continuing downward trend saw B-share holders like Li shift their focus away from the B-share market toward A shares, which have finally taken off after four sluggish years entering a bullish era late last year.

The number of B-share companies that Li considers worthy of investment has shrunk from 10 to three two listed in Shenzhen and one in Shanghai.

"No matter what kind of B-share reform the government will start, I believe it will be good news for B-share investors," said Li.