AI surge helps dual-listed mainland China stocks hit 1-year high premium over Hong Kong

Stock prices for Chinese companies trading on both the mainland and in Hong Kong have reached a near one-year high, driven by state-backed support and renewed interest in artificial intelligence. Dual-listed companies on the mainland, known as A shares, currently trade at a 23% premium compared to their Hong Kong counterparts, the H shares.

This price gap, known as the A-H premium, has been widening in recent months. Beijing has been directing state-backed investment vehicles to purchase A shares to protect against global market downturns, while the resurgence in AI has bolstered domestic tech hardware companies. In contrast, Hong Kong stocks have been relatively sluggish this year, lacking exposure to the AI sector.

The A-H premium represents the long-term pricing difference due to factors such as short-selling mechanisms, trading costs, liquidity, and foreign-exchange risks. Analyst Yao Pei from Huachuang Securities explained that the premium is influenced by these elements. Historically, A shares have been more expensive than H shares, except during severe bear markets, such as in 2006 and 2014.

The widening premium is primarily due to limited short-selling in Hong Kong, higher trading fees, and the inclusion of low-valued financial stocks in Hong Kong listings. Despite this, the long-term trend suggests that the premium may narrow as more prominent mainland companies list in Hong Kong, attracting global investors and reducing the gap from its peak of over 50% in early 2024.

To further enhance the market's appeal, Hong Kong's exchange has streamlined the process for mainland-listed firms to go public in Hong Kong, with at least 20 companies listing this year, including Zhongji Innolight, which raised US$6.8 billion in its debut. Data from Shanghai DZH revealed that 195 of the 202 dual-listed companies have more expensive mainland shares compared to their Hong Kong equivalents.

Smaller companies often exhibit larger premiums, such as auto-parts manufacturer Zhejiang Shibao, which trades at more than four times the price of its Hong Kong counterpart. Conversely, larger companies typically trade at a discount on the mainland; CATL's A shares are valued at a 31% discount to its H shares, the largest gap among all dual-listed firms, while China Merchants Bank and Zhongji Innolight trade at 7% and 6% lower, respectively.