A worker maintains equipment at a China Mobile data centre in Zhongwei City, northwest China’s Ningxia Hui Autonomous Region, in May 2019. Photo: Xinhua
Euphoria over China’s SOEs, AI inflate price gap for stocks listed on mainland and Hong Kong bourses to 5-month high
The A-shares of 150 dual-listed companies commanded a 42 per cent premium over their H-share counterparts this month, versus a 10-year average of 26 per cent
Among the biggest discrepancies, the yuan-denominated stock of China Life Insurance is almost three times as expensive as its Hong Kong stock
The pricing gap between the mainland China-listed and Hong Kong-listed shares of 150 dual-listed companies has ballooned to the highest level in five months as a frenzy over revaluation of China’s state-owned enterprises (SOEs) inflates yuan-traded shares.
The mainland-listed A-shares of the 150 companies, including Industrial and Commercial Bank of China (ICBC) and China Mobile, commanded a 42 per cent premium over their counterparts in Hong Kong, known as H-shares, this month, the highest level since December, according to a gauge compiled by Hang Seng Indexes. The average premium over the past decade is 26 per cent, Bloomberg data showed.
Overseas traders remain wary of buying into Chinese SOEs due to concerns about escalating tensions between Beijing and Washington, but onshore investors believe the stocks will benefit from policy tailwinds.
Yi Huiman, the chairman of the China Securities Regulatory Commission (CSRC), said in November that China’s listed SEOs were undervalued and called for a new methodology to value the stocks. The regulator of the state-owned assets, which is in charge of the central SOEs, also pledged in a government work report this year to improve efficiency and benchmark SOEs against the world’s top companies.
A view of the China Securities Regulatory Commission (CSRC) office building located at Beijing’s Financial Street in downtown Beijing on December 18, 2019. Photo: Simon Song
“The resilience of the onshore A-share market is underpinned by rotation into the SOEs and TMT [technology, media and telecoms] stocks,” said Xun Yugen, a strategist at Haitong Securities in Shanghai. “Investors in Hong Kong are more attentive to fundamentals and are more sensitive to the economy. They generally don’t have much exposure to such thematic investments. Furthermore, the Hong Kong market is more vulnerable to China-US tensions and the banking crisis in the US.”
Among the SOEs with the biggest price discrepancies, the yuan-denominated stock of China Life Insurance is almost three times as expensive as its stock trading in Hong Kong, while the premiums for China Eastern Airlines and China Mobile are 89 per cent and 75 per cent, respectively, according to data provider Shanghai DZH.
A digitalisation plan unveiled by Beijing in February and a frenzy over artificial intelligence (AI) technology have also aided the outperformance of onshore SOEs. Optimism has been mounting that the nation’s state-backed phone operators will gain an edge in the AI business thanks to policy support and their vast user databases. China Mobile and China Telecom have gained at least 59 per cent in Shanghai this year, while their shares in Hong Kong have risen 35 per cent.
Overseas investors, whose holdings account for about 40 per cent of the Hong Kong market, are more cautious about Chinese stocks, which delivered single-digit earnings growth in the first quarter amid macro-risks such as an uneven recovery of the economy and the potential for more US-imposed investment curbs on the tech sector.
Historically, the yuan-denominated shares of the dual-listed companies are pricier than their Hong Kong stocks, commanding an average of 23 per cent premium since the inception of the Hang Seng AH premium index in 2006. The widest gap was recorded in January 2008, when the A shares were 108 per cent more expensive than the H shares on average. In January, H shares were trading at their lowest discount to A shares in 20 months.
China Merchants Bank, the nation’s biggest retail lender, is the only dual-listed company whose mainland-listed shares are currently cheaper than its H shares, with a 2.8 per cent discount, according to DZH.
“The A and H share premium is at a relatively high level and that probably means more room for H shares to catch up in the future,” said Xun at Haitong Securities.
Mainland China listed shares are yuan-denominated and are subject to strict capital controls while the shares that are listed in Hong Kong are denominated in the US-dollar pegged Hong Kong dollar. A research paper from PBOC has recommended allowing for arbitrage trading as a way to close the gap.
