* Zhejiang Southeast Electric Power to convert B shares to A shares - sources
* Will necessitate decision on how to handle foreign owners of B shares
* Policy could allow for conversion of other B shares to A shares
* Announcement likely before Feb. 9 - company source
By Pete Sweeney
SHANGHAI, Jan 28 (Reuters) - A Chinese company is preparing to migrate its dollar-denominated B shares to the mainstream A-share board, two sources at banks advising on the deal told Reuters, signifying the beginning of a migration that could see individual foreign investors owning yuan-denominated shares in Chinese equities for the first time.
A source at China International Capital Corporation (CICC) and another source at Morgan Stanley's Chinese joint venture, Morgan Stanley Hua Xin, said that Zhejiang Southeast Electric Power Co is planning to convert its B shares trading in Shanghai into A shares.
A shares are only open to mainland investors and on a highly restricted basis to qualified foreign institutions such as banks or funds, which must apply for investment quotas.
The foreign-currency denominated B-share market was originally created specifically to allow foreign investors to buy shares in Chinese companies, but it lost relevance and popularity after regulators began letting Chinese companies access foreign capital directly by listing in Hong Kong and New York.
Trading in Zhejiang Southeast Electric's shares was suspended on Nov. 21 pending an announcement, and rumours began circulating in early January that the company, which recently took down its ticker from the London Stock Exchange, was planning a move from the tiny B-share market onto the main domestic board.
A source from Zhejiang Southeast Electric Power declined to confirm that it is planning to migrate its shares, but said he expects the company will make an announcement before the beginning of the Chinese Spring Festival, which begins on Feb. 9.
If the plan is approved by the China Securities Regulatory Commission (CSRC), it would require regulators to decide how to handle the foreigners currently allowed to buy and sell the company's B shares.
The main policy challenge lies in the fact that while the foreign currency-denominated B-share market hosts many foreign investors, foreign individuals are not legally permitted to directly trade on China's yuan-denominated A share market.
Technically speaking, allowing foreign owners of B shares to hold A shares constitutes an additional opening of China's capital account.
Regulatory approvals for companies moving off the board have engendered a rally in the B-share market as speculators buy shares in companies they think will be the next to migrate.
The B-share index has risen 30 percent since late November after China International Marine Containers (CIMC)) and property developer China Vanke both announced plans to migrate to Hong Kong.
However, most B-share companies are not qualified to move to Hong Kong, leaving them a choice between migration to domestic boards or retaining a ticker on the B-share board and risk delisting if regulators decide to close it down for good.