The AH premium index, a gauge of price gaps in dual-listed shares, has been falling rapidly recently after hitting a high of 138.96 points in the beginning of this year.
The index tumbled to a low of 122.58 points on April 16, the weakest level in nearly 10 months. That means prices of A-shares traded in mainland China were around 20 percent above their H-share counterparts listed in Hong Kong, narrowing the gap from early this year when they were over 38 percent more expensive.
There are both short term forces and long term factors behind the shrinking of the gap.
The divergent performance of financial counters is one of the short-term reasons contributing to the smaller gap.
Although China’s A-shares will be added into the MSCI Emerging Market Index in June, developments such as the US-China trade row and America’s export ban on ZTE are dampening the market outlook on mainland equities. This has helped narrow the AH share price difference.
Long-term trends play an important part too, with the integration of the China and Hong Kong markets being the primary one.
The stock valuations of the two markets used to be very different, due to varied investor structure and investment style. But such difference will diminish over time with the increasing two-way capital flows under the stock link programs.
For instance, in the past, mainland investors had limited access to overseas markets. Since they could only invest in A-shares, valuations sometimes became too aggressive.
But investors in Hong Kong can invest globally, and there is also a significant presence of international investors in the market. This has led to H-shares getting more fairly valued.
As H-shares were cheaper, it becomes a natural draw for mainland investors to come to Hong Kong market for bargains.
Also, since the stock link program started, mainland investors begin to embrace concepts such as value investment and fundamental analysis widely adopted by global investors.
At the same, given the increasing participation of Chinese investors in the local bourse, Hong Kong equities are now subject to bigger influence from China, shaping people’s investing approach and the way they interpret mainland policies, among other things.
As China further opens up its financial market, the price gap is set to narrow even more.
This article appeared in the Hong Kong Economic Journal on April 23
Translation by Julie Zhu
[Chinese version 中文版]
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