Would you be willing to pay a 42% premium to buy the same listed company in one country compared to another?
While in a normal world the the answer would almost certainly be no, that’s exactly what we’re seeing in mainland Chinese equities at present.
Yesterday the A-H share premium, the difference in the cost to buy the same Chinese company listed in China compared to Hong Kong, surged to 42.04%, the largest spread seen since 2009.
Barely months ago, it was oscillating between 20-35%.
The chart below, supplied by Thomson Reuters, tracks the A-H share spread premium compared to movements in China’s Shanghai Composite shown in pink over the past decade.
As you can see, the surge in the premium demanded to buy A-shares compared to their Hong Kong-listed H-share compatriots has only come in recent days.
It appears many were speculating that the MSCI would admit mainland Chinese stocks into its benchmark emerging market index, something that would support mainland Chinese stocks and pressure H-shares as a result of large-scale portfolio rebalancing.
Given this failed to materialise when the MSCI announced its latest review earlier today, it will be interesting to see whether the premium demanded to purchase mainland-listed stocks can continue to grow.
If the early price action in Chinese stocks today is anything to go by – the Shanghai Composite has fallen over 2% in early trade on Wednesday – it appears unlikely to be the case.
You can follow Vikram, the creator of the chart, on Twitter here.