Hong Kong-traded share of Chinese dual-listed companies are at their smallest discounts to their counterparts on the mainland in 15 months, reflecting the strong momentum in the city’s US$5.4 trillion equity market that has already entered a bull market.
An index compiled by Hang Seng Indexes, which tracks the price difference between the mainland Chinese company’s shares traded in Hong Kong, also known as “H shares”, and their mainland China-traded “A shares”, has fallen to 133.32 on Monday, the lowest since January 27, 2023. A reading above 100 indicates mainland stocks command premiums over those trading in Hong Kong, and vice versa for readings below 100, according to the compiler.
At the current levels, the H shares of 156 dual-listed companies, including the likes of Industrial and Commercial Bank of China and Ping An Insurance Group, trade at an average discount of 25 per cent to their shares trading in Shanghai or Shenzhen.
China’s tight capital controls limit the ability of Chinese investors to expatriate funds and restrict them to investing in A shares, generally boosting their share prices and valuations above those of H shares.
But the four-month rally in Hong Kong stocks, which has boosted the Hang Seng Index by 11 per cent this month alone, has narrowed the gap as bargain-seeking global investors are returning, with China ramping up efforts to resolve the property-market crisis. Even after these gains, the Hang Seng gauge trades at 6.9 times reported earnings, the cheapest globally, according to Bloomberg data.
“There will be some divisions as to where the markets will head after this decent run,” Fang Yi, Guotai Junan Securities in Shanghai. “But for us, Hong Kong stocks have more upside room on earnings improvement expectations amid increased policy support for China’s property market and upgrading of China’s growth forecast by overseas investment banks.”
Morgan Stanley raised the year-end target for the Hang Seng Index by 21 per cent on Sunday, saying that the 82-member benchmark would finish the year at 19,377.
The Hang Seng Index has now risen by nearly a third from its January trough, more than the 20 per cent gain threshold defined as a bull market. For the year, it has jumped 15 per cent, outperforming a 7.6 per cent gain by the CSI 300 Index of Chinese yuan-traded shares.
Among the 156 companies with dual listings, small-capitalisation companies have bigger price gaps, with the yuan stocks being much more expensive than H shares, while the discrepancy for big companies is smaller. For instance, yuan shares of Holly Futures, a local futures brokerage based in east Jiangsu province, are more than seven times as expensive as that of their H stocks, while the premium for China Merchants Bank, the biggest retail lender, is only 3.1 per cent, according to data provider Shanghai DZH.
“A stabilisation in the property market will reduce the uncertainty of China’s economy and lower the downside risk of growth,” said Shen Chao, the firm’s strategist. “For equities, the valuation will continue to be reassessed for a further uptick in the market.”