Premium on dual-listed Chinese companies' domestic shares over their Hong Kong counterparts seen widening in 2024 on policy tailwinds

Dual-listed Chinese companies traditionally command higher valuations for their shares on domestic exchanges than their own shares listed in Hong Kong. That premium, currently close to the highest in 13 months, is expected to widen next year on policy tailwinds, analysts said.

On average, yuan-based stock, or A shares, fetched 51 per cent more than their counterparts traded in Hong Kong on December 14, according to the Hang Seng AH Premium Index. That was the biggest price advantage since November 2022.

The gap had fallen back slightly, to 49 per cent on December 22, the gauge showed.

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There are 149 mainland Chinese companies with such dual listings, with premiums ranging from 4 to 750 per cent after currency conversion, according to data provider Shanghai DZH.

Hong Kong ranks as the worst performer among major world equity markets this year. The Hang Seng Index has lost 17 per cent, with China's biggest tech champions suffering another punishing year. The Shanghai Composite Index fell 5.7 per cent, as Beijing's market-friendly measures tempered losses.

"The withdrawals of overseas funds have played a key role in the rout in Hong Kong," said Dai Ming, a fund manager at Huichen Asset Management in Shanghai. China's fragile economic recovery and US interest-rate increases had also pressured selling, he added.

Foreign investors account for 40 per cent of Hong Kong's US$4.6 trillion market, but own only 4 per cent of yuan-traded shares. They sold US$2.3 billion of Hong Kong stocks in December, according to Morgan Stanley, the US investment bank.

Active long-only funds have been cutting their positions since mid-November to meet year-end peak redemptions, hurting stocks like Alibaba Group, Tencent and Baidu, the bank said.

Holly Futures, a futures brokerage based in Nanjing in eastern Jiangsu province, has the biggest premium, according to Shanghai DZH. Its Shenzhen-traded stock closed at 11.20 yuan on Friday, 750 per cent above its Hong Kong-listed shares.

Car accessories maker Zhejiang Shibao and Beijing Jingcheng Machinery Electric are next at 598 per cent and 423 per cent respectively. The smallest premium is in Wuxi Apptec shares at 4.1 per cent.

The substantial valuation discrepancy is unlikely to narrow any time soon. Stocks listed in Shenzhen and Shanghai enjoy better support at home, with investors willing to pay more for stronger policy tailwinds, prompting Morgan Stanley to favour them.

Historically, policy easing measures like cuts in banks' reserve requirement ratios and lending rates, have a greater impact on the onshore market, said the investment bank. Local shares also benefit from potential market intervention, such as state fund purchases, it added.

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