China's market for foreign-currency-denominated stocks, or so-called B shares, has languished for over three years. But the possibility for revaluation of China's yuan may provide investors a chance to eke some gains out of B shares.

It's anybody��s guess when the government might readjust its 11-year-old de facto yuan peg to the U.S. dollar. When it happens, China asset values are expected to surge and B shares represent one way for foreign investors to get a piece of the action. Some Japanese investors are already placing bets on B shares, market experts say.

To be sure, there are reasons for caution. Not all B shares show equal promise, and the sector is still a secondary way to cash in on any currency revaluation or speculative money flows, compared with yuan-denominated A shares.

But for foreign investors not able to access accounts through so-called qualified foreign institutional investors (QFIIs) who trade in A shares, B shares may be the next best thing.

"The yuan revaluation is positive for the overall B-share market, although fundamentals of individual listings should matter more,�� said Jeckson Lu, an analyst at Shanghai Shenyin Wanguo Research & Consulting Co.

U.S. dollar and Hong Kong dollar-denominated B shares trade, respectively, on the Shanghai and Shenzhen bourses.

Sun Changling, chief representative in Shanghai of Naito Securities, one of the first brokers in Japan licensed to help individual investors trade Chinese shares in the 1990s, said the brokerage's trading value of Chinese stocks soared four times from the previous year in 2004, when speculation for yuan appreciation stepped up. She declined to provide figures.

Sun said Naito��s clients bought more B shares than they��ve sold, despite a bearish market last year in the wake of government tightening measures to curb economic overheating.

"The biggest driver for Japanese investors to buy Chinese shares is the (anticipated) appreciation of the yuan," Sun said.

Japanese investors may be taking a cue from their own yen currency and the 1985 Plaza Accord.

The Plaza Accord, named after the New York hotel where it was signed, was aimed at devaluing the U.S. dollar against the yen and the German mark, partly to help curb the U.S. current account deficit. The yen soared in the accord's wake, and with it Japan��s stock and property prices.

Analysts say that B shares listed in Shenzhen are preferable to their Shanghai counterparts. Seven B shares made the top 20 stock gainers in the first month of this year in Shenzhen, including the world��s largest container ship maker China International Marine Containers (Group) Co., Yantai Changyu Pioneer Wine Co., major property developer China Vanke Co., Shandong Chenming Paper Holdings Co. and Shandong Airlines Co.

Based on third-quarter earnings last year, half of Shenzhen��s 56 B-share firms earned more than 0.10 yuan (US$0.012) per share, while none of the earnings per share of those in Shanghai rose above 0.10 yuan, according to data from Xiangcai Securities Co.

Analysts suggest B-share listings of property firms, paper manufacturers and airlines.

They say the latter two are likely to gain from a stronger yuan because China's paper makers rely heavily on imported raw materials like pulp, while carriers on a plane-buying binge have been financing their purchases with foreign borrowing. Property developers are likely to gain from higher property prices if the yuan is allowed to strengthen.

China's B shares have had a tumultuous history. The first B shares began trading on the local bourses in February 1992, a venue for local firms to raise foreign-currency funds for business development, as well as a means for regulators to keep a tight hold on currency flows at a time when the yuan was barely convertible.

Only foreign investors were allowed to trade B shares, but Chinese residents still managed to participate through regulatory loopholes.

It wasn��t until nine years later that China opened the B-share market to domestic individual investors as part of market reforms. Trading value of the B-share market in 2001 soared more than nine times from the previous year to a record high 506.3 billion yuan.

But the move was too little, too late. The opening didn't include deep-pocketed domestic institutional investors and it came a few months after the very last B-share initial public offering launched in October 2000.

By that time, the yuan had been fully convertible under China's current account for four years and capital-account exchanges were slowly being relaxed. Plans were being laid to allow the first qualified foreign institutional investors to enter the A-share market, which they did in mid-2003.

The trading value of Shanghai B shares last year totaled 24.13 billion yuan, a fragment compared with the 2.62 trillion yuan trading value of Shanghai A shares. The overall listings of 110 B shares last year was dwarfed by 1,236 A shares.

Shenzhen Daily/Agencies