The persistent hope of a merger between A and B shares and pledges from regulators to reform the hard currency market has fuelled active buying of B shares in the past few weeks.

But analysts said the counter's stable growth demands more substantial measures from the government and improvement in company performance.

"Some foreign investors are back into the market as their confidence builds up, but some are still watching," said an analyst with a European securities house, who preferred not to be named.

"But simply policy boosting is certainly not enough for a stable growth of the market," he said.

The quality of listed companies, market supervision and prevention of illegal practices are all key factors in pushing up the B-share market, he said.

The B-share market, reserved for foreign investors only, has surged most of the year on expectations of a merger with A shares, which investors believe would eventually boost B-share prices.

But the counter experienced a sharp correction in August and September as no solid plan emerged to bolster the market. Investment was brought to life again recently after a top securities regulator gave some details of B-share market reforms.

China Securities Regulatory Commission (CSRC) chairman Zhou Xiaochuan said two weeks ago that foreign brokers would be allowed to trade B shares directly through special seats at the exchanges and approved the establishment of Sino-foreign joint venture mutual fund management companies and brokerages.

He also said foreign companies would be permitted to list A shares though he gave no timetable.

The comments have triggered sharp gains in B shares over the past two weeks, which analysts said would give market sentiment another boost and continue to raise prices in the near term.

Though there might still be some fluctuation, the medium and long-term prospects for the B-share market are bright, analysts said.

"The remarks by Zhou are certainly encouraging for B-share investors," said Chen Yao, an analyst with Shanghai Ping'an Securities, "But it does not imply a fundamental change to the existing policy so investors may be over-excited."

The focus for the opening-up of China's stock market is setting a timetable for the liberalization of the renminbi under capital account, so foreign investors could make direct investment in China's capital market more freely.

That is not a hush and rush work, said Liu Hongru, former chairman of CSRC at its founding and now an influential securities adviser. The foreign exchange system can not be changed overnight, Liu said.

Yi Gan, a senior official with the People's Bank of China, said recently that the state would liberalize renminbi under capital account before 2015.

But the period is seen as too long for foreign investors.

A merger with A and B shares is unavoidable, but it has to be conducted gradually in different phases, said Liu.

Anthony Neoh, chief adviser to CSRC and former chairman of Hong Kong Securities and Futures Commission, told reporters recently that the merger would take two to three years.

"The task for now is to think out a way to get foreign financing directly within the current exchange regime," Liu said.

Experts have suggested the government should adopt the QFII (Qualified Foreign Institutional Investors) system as a transitional measure for the opening-up.

That would allow qualified investors to trade A shares directly through a special account and with certain trading volume limits.

The scheme is under active consideration by the CSRC, Liu said.

As to opening the B-share market to domestic investors, Liu suggested the establishment of a B-share fund, through which domestic investors with foreign currencies could trade B shares.

Meanwhile, more reforms still need to be done, he said. Besides poor company quality, the major problems with the B-share market also include low transparency and small liquidity.

With just 114 listed companies valued at around US$5.8 billion, the B-share market has lagged behind the A-share market, which boasts more than 1,000 companies valued at over 4 trillion yuan (US$481 billion).

Fan Ying, an analyst with China Securities, said more systematic renovations should be introduced to the B-share market, such as enhanced information disclosure and creation of a competition mechanism that trims off the poorest performing stocks.

(China Daily 11/5/2000)