China's stocks near record

Liquidity in share trading will be boosted

China's stock markets shot up again on Thursday, the second day that domestic investors were allowed to trade in shares previously restricted to foreigners.

The market again hit its 10% limit within hours of opening, ending trade for the day and putting their lifetime highs within reach.

Despite state media warnings about "stir frying", the local slang for speculating on shares, hundreds of thousands of investors tried to trade.

If the trend continues, the Shanghai B-shares will break through the high of 107.7 set in December 1993 on Friday and the Shenzhen B-shares should hit the December 1996 high of 201.8 some time next week.

New rules

The rush by domestic investors follows legal changes allowing Chinese with authorised foreign currency accounts to trade in US or Hong Kong dollar denominated shares, known as B-shares.

Domestic investors could previously only trade in A-shares denominated in the local currency, the Yuan.

Despite state media warnings about the poor growth prospects of many companies and dangers of losing investments, the Shanghai B index closed at 100.4 and the Shenzhen B share index closed at 153.7, a 20% rise on both indices since trade resumed on Wednesday.

Both were hampered by low trading volumes, as people held onto shares hoping to cash-in on further rises, resulting in huge jumps in the price of the few shares available. The A-share index fell for the second day.

Markets to converge

Demand for B-shares from foreign investors continues to be weak as it was before the changes to trading.

The black market that emerged in China for B-shares because of the trading restrictions prompted the regulatory authorities to make the change.

Big rush to market by domestic investors

Locals opened 340,000 new B-share accounts ahead of the start of trading, more than doubling the previous total of 280 000.

B-shares have traditionally traded at a 75% discount to the A-shares, but the two markets are now rapidly converging.

More volatility and liquidity

"Volatility will increase the risk profile, but I think the merger [of the A and B shares], if that happens, will also increase liquidity as well and that will benefit investors," said a spokesman for BNP Paribas Peregrine.

Authorised trading accounts have doubled since rule change

Trade in all B-shares was suspended on 19 February ahead of the rule change to allow computer systems to be updated before the market resumed.

An expected surge in the Hong Kong's H-share index, its equivalent of the A and B shares, failed to materialise when mainland trade resumed.

While it is expected all of China's stock markets will eventually converge, it will depend on the Yuan being made convertible on the foreign exchanges.