Great Wall Securities: Should You Buy A-shares or H-shares? Allocation Strategies from a Premium Perspective

Since 2006, the AH premium has been influenced by the Federal Reserve’s monetary policy and the mechanisms of China’s capital markets, going through three phases: mean reversion upward, stable movement in low levels, and an elevation of the central tendency. Since the introduction of the “package of incremental financial policies” in September 2024, the market has entered a period of convergent repair; Southbound capital has strengthened its ability to absorb H-share assets trading at a discount, and the price spread between the two markets has moved into an accelerated repair channel. Currently, industry premiums show significant divergence: cash-flow-stable industries such as non-ferrous metals, banks, and food and beverage typically have lower AH premiums; while core assets such as CATL and China Merchants Bank have shown a negative premium phenomenon—H shares trading at a higher price than A shares—due to the “certainty-driven aesthetics” of global long-term funds.

We calculated the average AH premium as of March 2026 (up to March 25) for 177 stocks that are listed simultaneously on both A-shares and H-shares. For industries such as non-ferrous metals, banks, food and beverage, coal, and transportation & logistics that exhibit characteristics of a cyclical uptrend or stable cash flows, AH premiums are often at relatively low levels. By contrast, in industries such as agriculture, building materials, and automobiles, AH premiums show clear differentiation within the industry. In these sectors, the market may place greater emphasis on individual stock’s alpha opportunities.

Among the 177 common underlying stocks, industry leaders such as CATL, China Merchants Bank, WuXi AppTec, Zhaojie Innovation, Sihuan Integrated Technology, and Henrui Medicine exhibit the phenomenon of H shares trading at a higher valuation than A shares, reflecting the “certainty-driven aesthetics” and “allocation rigidity” of global long-term funds toward China’s core assets. Judging from the proportion of Hong Kong shares held by Southbound funds, domestic investors do not have very high pricing power over those Hong Kong stocks that generate negative AH premiums. In other words, this negative premium is caused by foreign investors’ strong preference for these stocks. Foreign investors’ pricing models strongly favor companies with global competitiveness, high ROE, and transparent governance. They treat these as “must-have Alpha” for China’s growth, creating extremely high levels of capital lock-in in the offshore market. Although A-share prices are lower, global institutional investors choose A shares mainly through specific channels such as QFII/RQFII or the Shanghai-Hong Kong Stock Connect, where practical operations face constraints such as quota approvals and cross-border fund remittance procedures. By comparison, H shares, as offshore assets, have their Hong Kong-dollar pricing pegged to the U.S. dollar, naturally aligning with global funds’ local-currency performance evaluation needs.

From the characteristics of stocks ranked relatively high by the Hong Kong discount, most of the stocks with a higher Hong Kong discount likely share the following features: 1) smaller market capitalization, with industries that are highly cyclical; or 2) ROE below 10% and comparatively pressured profitability.

Which is more cost-effective: A shares or H shares? Two decision factors

Decision factor one: Post-tax interest spread compensation

From the perspective of obtaining dividends, if the H-share nominal dividend yield * 80% - A-share dividend yield - FX friction (set at 0.8% in this report) > 0, then holding H shares may, to a certain extent, offer better value than holding A shares.

In the AH allocation decisions for the 177 AH-listed underlying stocks, the nominal dividend yield is often misleading due to valuation differences between the two places. This factor restores the “net cash return” actually received by domestic investors by forcibly incorporating 20% of the H-share nominal dividend yield as the dividend withholding-tax cost under the Hong Kong Stock Connect (i.e., H-share nominal dividend yield * 80%), and then compares it against the A-share dividend yield to form the true interest-rate spread. In this report, we use the offshore asset allocation “certainty safety margin” as 4% * 0.2 (i.e., 0.8%) of the Hong Kong dollar versus RMB volatility over the past nearly 5 years, to hedge against RMB exchange-rate fluctuations, offshore liquidity discounts, and cross-border settlement time costs. When the net dividend spread breaks through this threshold, the asset’s characteristics shift from a “game-driven asset” driven by foreign investor sentiment into a “bond-like allocation asset” with absolute-return appeal. At that point, the high yield spread after dividend tax not only provides a very strong downside risk buffer, but also becomes the fundamental driving force for Southbound capital to carry out systematic rotation—pushing the AH premium toward convergence with intrinsic value.

Explanation of the certainty safety margin calculation: (4%) * 0.2 for the Hong Kong dollar versus RMB volatility over the past nearly 5 years. This means we only pay the spread cost for the “most likely mild appreciation,” while treating large-scale currency fluctuations (such as dramatic appreciation beyond a 1x volatility) as “systemic risk,” and covering them through dynamic rebalancing rather than reserving the spread.

Decision factor two: The ROE–premium rate matching factor (identifying sentiment-driven mispricing)

If a company’s return on equity (ROE) remains stable or is in an upcycle, then the extreme discount appearing in the Hong Kong market (i.e., AH premium rate surging) actually lacks fundamental logic. It may be mainly caused by a decline in risk appetite in the offshore market or by liquidity tightening.

We screen for targets with 2025 Q3 ROE (TTM) > 10% and achieved ROE growth for three consecutive years, as well as for those with relatively high AH premium. This step is intended to anchor the “endogenous stability” of core assets. Against the backdrop of fluctuations in global geopolitics and macro cycles, companies that can maintain ROE expansion for three consecutive years prove that they have very strong industry bargaining power and operating resilience. This sustained upward earnings curve forms the most solid defensive base for the stock price, eliminating the “value trap” where premiums are passively inflated due to fundamental deterioration.

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Three key variables affecting the AH premium in 2026

1. “Second pricing” under energy inflation pressure: convergence of premiums for resource stocks

High oil prices are directly beneficial for the energy and raw materials segments among AH-listed stocks (such as PetroChina, CNOOC, China Aluminum, etc.). However, in terms of AH premium performance, an interesting feature emerges: H shares outperform A shares (i.e., the AH premium marginally narrows).

As an offshore market extremely sensitive to global commodity pricing, Hong Kong’s valuation recovery for resource-sector segments typically happens earlier and more thoroughly than in A shares. With oil prices supporting above $90, global long-term funds are more inclined to search for defensive assets among discounted H shares.

This upward revision to earnings driven by geopolitics will prompt Southbound capital to accelerate buying of discounted energy H shares. Under the influence of geopolitical conflict, the premium rate in the energy sector may show主动式 contraction, and even some high-quality energy stocks may reach historically lower premium levels.

2. Reduced rate-cut expectations from the Federal Reserve: “valuation suppression” from offshore liquidity

The Federal Reserve maintaining resilience in the 3.5%–3.75% interest-rate range exceeds early-year market expectations. This is a significant negative variable for Hong Kong stocks (H shares) as a whole.

A delayed rate-cut outlook means the denominator side of Hong Kong stocks (the discount rate) cannot decline as scheduled. When U.S. Treasury yields remain elevated and fluctuate, the liquidity environment for Hong Kong stocks remains in a “tight-but-balanced” state. By comparison, A shares are mainly driven by domestic monetary policy (currently relatively independent and leaning toward easing), so the marginal impact from the Federal Reserve is smaller.

For growth stocks that are highly sensitive to interest rates—such as Hang Seng Tech and biotech—failure of the rate-cut outlook would hinder rebounds in their H shares, while A shares may perform more steadily due to domestic policy support. This would mean that, in the short term, the AH premium for growth sectors may not contract; instead, it may face a period of rebound or continued high-range volatility.

3. Repricing of “dividend/benefit-bearing assets” driven by risk-aversion sentiment

Concerns about stagflation caused by high oil prices (high inflation + low growth) have led to a pullback in global risk appetite. In this context, “dividend/benefit-bearing assets” with extremely high certainty become the market’s safe haven.

In the AH-listed universe, large financials and utilities sectors have already benefited from expectations of dividend-tax relief. Now, with additional uncertainty stemming from high oil prices, capital will further gather into defensive stocks with stable cash flows.

This is a tug-of-war on both sides. On the one hand, high interest rates suppress overall Hong Kong stock valuations; on the other hand, defensive capital also craves extremely high dividend yields in H shares. The final outcome may be: AH premiums for high-dividend sectors enter a state of “low-level dulling”—that is, premiums are already low, but because external liquidity does not loosen, H shares also struggle to achieve the final step of “at-par premium,” staying within a small discount range.

Risk warning

Disturbance from geopolitical conflicts, U.S. economic growth stalling, global risk appetite declining, overseas demand falling short of expectations

（Source: Great Wall Securities）