Shanghai's hard currency B-share index rose 0.76 percent to end at 120.86 points while its Shenzhen counterpart gained more than 1 per cent to 199.07.

Turnover on the B-share markets was US$17.56 million in Shanghai, down 12 percent, and HK$134.13 million (US$17.20 million) in Shenzhen, up 38.1 percent from Monday.

China's shares have been caught in a 19-month downturn as regulators cracked down on market irregularities - unveiling a series of corporate scandals - and as cash-hungry firms queued up to raise capital by issuing shares.

But small caps, especially loss-makers, are a perennial favorite with Chinese punters as the shares tend to be volatile and offer the potential for windfall gains.

"Some punters very much like to speculate on such firms and regard them as potential dark horses," said Ren Chengde, an analyst at Galaxy Securities.

Fenghua, which makes high-tech equipment for the aerospace industry, pushed its daily 10 per cent limit to 15.38 yuan (US$1.86).

Construction material maker Fangda, which posted a loss of 64.38 million yuan (US$7.78 million) for the first nine months, was the biggest B-share gainer in Shenzhen and surged 6.18 per cent to HK$3.95 (US$0.51).

Liquidity issues continued to haunt the markets, however, as more companies prepared to launch share offers. Investors worried that too many initial public offerings (IPOs) coming too close together would overwhelm already sluggish turnover.

Yesterday alone, securities sources gave details of two companies hoping to raise money through IPOs on the yuan-denominated A-share markets - Anhui Expressway Co Ltd and Shanghai Municipal Electric Power Co.

Shanghai Power's market debut is expected to be worth 1.3 billion yuan (US$157 million), while Anhui Expressway's would be worth 550 million yuan (US$66 million).

Analyst said they expected narrow market movements in the short term, since most brokerages were busy closing books for the year.

"There will be little chance for share indices to fall further in the near term," said Yu Xiaoli, a Haitong Securities analyst.

"But a liquidity shortage at the year end will also prevent big gains and investors will have to wait for the New Year for any bullishness," she added.

The People's Bank of China also said yesterday that foreign banks would be allowed to designate only one branch each to handle custodial business for a newly launched qualified foreign institutional investor (QFII) scheme.

Citibank, Hong Kong Shanghai Banking Corporation and Standard Chartered Bank are among a handful of foreign banks which have applied to be custodial banks for the QFII scheme.

The scheme allows select foreign investors to trade Chinese-only A shares for the first time, but they have to choose a Chinese commercial bank or a foreign bank with a local branch to take custody of their money.

While foreign banks have jumped at the chance to take on custodial business, overseas investors were more cautious and wary of sinking money in China's murky markets.

The benchmark Shanghai composite index, which groups the A and B shares, gained 0.54 percent to 1416.096 points.

The turnover on the Shanghai market stood at 4.84 billion yuan (US$585 million) at the close of the market and the figure for the Shenzhen bourse was 3.98 billion yuan (US$481 million).

(China Daily December 18, 2002)