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: an upward movement in the mean, a period of stable trading at low levels, and a rise in the central tendency. Since the introduction of the “package of incremental financial policies” in September 2024, the market has entered a phase of convergence and repair. Southbound capital has strengthened its ability to absorb H-share assets trading at discounts, and the price spread between the two markets has entered a fast-track channel for repair. Currently, industry premiums are showing significant divergence: industries with stable cash flows such as nonferrous metals, banks, and food and beverage tend to have lower AH premiums; while core assets such as Contemporary Amperex Technology Co., Ltd. and China Merchants Bank show a negative premium—i.e., H shares trading above A shares—driven by the “certainty-based aesthetic” of global long-term capital.

We analyzed the average AH premium of 177 stocks that are listed simultaneously in both A and H shares in March 2026 (as of March 25). For industries such as nonferrous metals, banking, food and beverage, coal, and transportation that exhibit upward cyclical characteristics or stable cash-flow profiles, the AH premium is often positioned at relatively low levels. By contrast, for industries such as agriculture, building materials, and automobiles, the AH premium shows clear divergence within each industry. In these sectors, the market may place more emphasis on individual-stock opportunities for alpha.

Among the 177 common underlying names, industry leaders such as Contemporary Amperex Technology Co., Ltd., China Merchants Bank, WuXi AppTec, Zhaoji Innovation, GigaDevice, and Hengrui Medicine are exhibiting the phenomenon of H shares trading at a premium over A shares, reflecting the “certainty-based aesthetic” and “configuration rigidity” of global long-term capital toward China’s core assets. Judging by the proportion of shares held in Hong Kong by southbound capital, domestic investors do not have very strong pricing power over Hong Kong stocks that generate negative AH premiums. In other words, these negative premiums are caused by foreign investors’ preference for these stocks. Foreign-investor pricing models strongly favor companies with global competitiveness, high ROE, and transparent governance. They treat them as essential Alpha for China’s growth, forming extremely high levels of chip-locking in the offshore market. Although A-share prices are lower, global institutional investors primarily choose A shares through specific channels such as QFII/RQFII or the Shanghai–Hong Kong Stock Connect, which in practice 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 linked to the U.S. dollar, naturally aligning with global funds’ local-currency performance assessment needs.

From the characteristics of stocks ranked relatively high by the Hong Kong-share discount, stocks with higher discount levels likely mostly have common traits such as 1) smaller market capitalization and the industry having a strong cyclical profile, or 2) ROE below 10% and relatively pressured profitability.

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

Decision factor one: After-tax interest/spread compensation

From the perspective of receiving dividends, if H-share nominal dividend yield * 80% - A-share dividend yield - FX friction (set at 0.8% in this report) > 0, then holding H shares rather than A shares may be more cost-effective to a certain extent.

In the AH-share allocation decisions for the 177 AH underlying names, the nominal dividend yield is often misleading due to valuation differences between the two markets. This factor deducts, via a forced inclusion, 20% of the 港股通 dividend tax cost for H-share nominal dividend yield (i.e., H-share nominal dividend yield * 80%), restoring the “net cash return actually received in the investor’s pocket” by domestic investors, and using it to match against the A-share dividend yield to form a real dividend spread. In this report, we use the near-5-year fluctuation midpoint of the Hong Kong dollar versus the RMB (4%) * 0.2 (i.e., 0.8%) as a “certainty-based safety margin” for offshore-asset allocation, to hedge against RMB FX volatility, offshore liquidity discounts, and cross-border settlement time costs. When the net dividend spread surpasses this threshold, the underlying’s attributes shift from a “game-playing asset” driven by offshore investors’ sentiment to a “bond-like allocation asset” with absolute-return appeal. At that point, the high dividend spread after dividend tax not only provides a very strong downside risk cushion, but also becomes the fundamental driver for southbound capital to conduct systematic rotation—forcing the AH premium to converge toward intrinsic value.

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

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

If a company’s return on net assets (ROE) remains steady or is in an upcycle, then the extreme discount it experiences in the Hong Kong market (i.e., a surge in the AH premium rate) actually lacks fundamental logic, and may be mainly caused by a decline in offshore market risk appetite or tighter liquidity.

We screen for targets with 2025Q3 ROE (TTM) > 10% and achieving ROE growth for three consecutive years, as well as those with AH premiums ranking toward the front. This step aims to anchor the “endogenous stability” of core assets. Against the backdrop of global geopolitical and macro-cycle fluctuations, companies able to maintain ROE expansion for three consecutive years demonstrate very strong industry pricing power and operational resilience. A sustained upward earnings curve like this forms the most solid defensive base for the stock price, eliminating “value traps” where the premium is passively inflated due to deterioration in fundamentals.

Three key variables affecting the AH premium in 2026

1. “Second-round pricing” under energy inflation pressure: premium convergence for resource-sector stocks

High oil prices are a direct positive for energy and raw-material sectors among stocks dually listed in AH (e.g., PetroChina, CNOOC, and China Aluminum). However, in terms of AH premium performance, an interesting “H shares stronger than A shares” characteristic emerges (the AH premium margin narrows).

As Hong Kong is an offshore market that is highly sensitive to global commodity pricing, the valuation repair of its resource sectors is typically earlier and more thorough than in A shares. Supported by oil prices above $90, global long-term capital is more inclined to search for defensive assets among discounted H shares.

This upward revision to earnings, triggered by geopolitics, will drive southbound capital to accelerate buying of discounted energy H shares. Under the impact of geopolitical conflict, the energy sector’s premium rate may show an active contraction, and even some high-quality energy stocks may reach historical lower premium levels.

2. Weakened expectations of Fed rate cuts: “valuation pressure” from offshore liquidity

The Federal Reserve maintaining the resilience of the 3.5%–3.75% interest-rate range is beyond early-year market expectations. For Hong Kong stocks (H shares) overall, this is a notable negative variable.

Delayed rate-cut expectations mean that the denominator side of Hong Kong stocks (the discount rate) cannot fall as expected. When U.S. Treasury yields remain volatile at high levels, Hong Kong’s liquidity environment stays in a “tight-but-balanced” state. By comparison, A shares are mainly driven by domestic monetary policy (which is currently relatively independent and somewhat accommodative), so the marginal effects influenced by the Fed are smaller.

For growth stocks that are extremely sensitive to interest rates—such as those in Hong Kong tech (Hang Seng TECH) and biotech/pharmaceuticals—if rate-cut expectations fail to materialize, the rebound in their H shares will be hindered, while A shares may perform more steadily due to domestic policy support. This will likely result in AH premiums for growth sectors not only failing to contract in the short term, but potentially facing a cyclical rebound or staying in a high-level, sideways-to-volatile range.

3. Repricing of “dividend/benefit assets” under risk-off sentiment

Stagflation concerns caused by high oil prices (high inflation + low growth) lead to a retreat in global risk appetite. In this environment, “dividend/benefit assets” with very high certainty become the safe haven for the whole market.

Large financials and utility sectors among dually listed AH stocks already benefit from expectations of dividend tax relief. Now, with the added uncertainty stemming from high oil prices, capital will further concentrate on defensive stocks with stable cash flows.

This becomes a two-way contest. On one hand, high interest rates suppress the overall valuation of Hong Kong stocks; on the other hand, risk-off funds crave the very high dividend yields of H shares. The end result could be that AH premiums for high-dividend sectors enter a state of “low-level dulling”—that is, the premium is already very low, but because external liquidity does not loosen, H shares are also unable to take the final step toward “equal-premium pricing,” remaining in a modest discount range.

Risk warning: 　　Geopolitical conflict disruptions, the slowdown in U.S. economic growth, a decline in global risk appetite, and overseas demand not meeting expectations

1

Observations on the AH premium situation

Since 2006, the AH premium can be divided into four distinct historical stages according to the Federal Reserve’s monetary policy cycles and the progress in improving China’s capital market mechanisms. From September 2024 to the present, the AH premium has been in a clear downward channel.

Period of rising mean (2006-2008) coincided with a rapid upward surge in valuation levels in the domestic equity market; the CSI 300 index showed a distinct upward trend. During this period, the AH premium index rose in parallel and reached historical highs of more than 200, reflecting a significant divergence in risk pricing by domestic and international investors for the same underlying assets.

Stable period at lower levels (2009-2014) saw the CSI 300 index enter a long-cycle range-bound adjustment phase. During this period, the two markets’ valuation systems exhibited relatively high similarity. The AH premium index returned to around 100 (parity) multiple times, and even showed short-term inversion, indicating that the offshore market’s pricing logic for domestic assets was in a deep correction phase.

Central tendency rising period (2015-2024.08) since the launch of the Shanghai–Hong Kong Stock Connect in late 2014 and the Shenzhen–Hong Kong Stock Connect in 2016, the AH premium index, while rising from around the 100 central point to 130-150, saw a significant decline in volatility—ending the “pulse-like” trajectory seen before 2015.

Convergence-and-repair period (2024.09 to present) since the introduction of the “package of incremental financial policies” in September 2024, the CSI 300 index showed a significant repair, while the AH premium index displayed an “inward convergence” trend. This feature differs from previous periods of synchronous widening; it suggests that with the deepening of the connect-and-commonly-access mechanism, southbound capital’s capacity to absorb discounted H-share assets has strengthened, and the price spread between the two markets has entered an accelerated repair channel. In addition, the downward move in the AH premium is also closely related to the Federal Reserve entering a rate-cut cycle in 2024, which improved global financial conditions.

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2

AH premium structure and characteristics of AH negative-premium stocks

We calculated the average AH premium of 177 stocks simultaneously listed in both AH shares in March 2026 (as of March 25). For industries such as nonferrous metals, banks, food and beverage, coal, and transportation that have upward cyclical characteristics or stable cash-flow profiles, the AH premium is often at lower levels. Meanwhile, for industries such as agriculture, building materials, and automobiles, the AH premium shows clear divergence within each industry. In these industries, the market may place greater emphasis on individual-stock alpha opportunities.

…

Among the 177 common underlying names, industry leaders such as Contemporary Amperex Technology Co., Ltd., China Merchants Bank, WuXi AppTec, Zhaoji Innovation, GigaDevice, and Hengrui Medicine are exhibiting the phenomenon of H shares trading at a premium over A shares, reflecting the “certainty-based aesthetic” and “configuration rigidity” of global long-term capital toward China’s core assets. Judging by the proportion of Hong Kong shares held by southbound capital, domestic investors do not have very strong pricing power over Hong Kong stocks that generate negative AH premiums; it can be said that this negative premium is caused by foreign investors valuing these stocks highly. Foreign-investor pricing models strongly prefer securities with global competitiveness, high ROE, and transparent governance, treating them as a must-have Alpha for China’s growth, forming very high levels of chip-locking in offshore markets. Although the prices of A shares are lower, global institutional investors’ choice of A shares is mainly through specific channels such as QFII/RQFII or the Shanghai–Hong Kong Stock Connect. In actual execution, they face constraints such as quota approvals and cross-border fund remittance procedures. In contrast, H shares, as offshore assets, have their Hong Kong-dollar pricing pegged to the U.S. dollar, naturally aligning with global funds’ requirements for measuring performance in their base currencies.

…

In terms of the characteristics of stocks with relatively high discounts in Hong Kong shares, those with higher Hong Kong-share discounts most likely have common traits such as 1）smaller market capitalization and strong cyclicality at the industry level, or 2）ROE below 10% and relatively pressured profitability.

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3

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

Decision factor one: After-tax dividend spread compensation

From the perspective of receiving dividends, if 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 be more cost-effective than holding A shares to some extent.

…

In the AH allocation decision for the 177 AH underlying names, the nominal dividend yield is often misleading due to the valuation gap between the two markets. This factor restores the true spread by forcing the inclusion of 20% of the 港股通 dividend tax cost for the H-share nominal dividend yield (i.e., H-share nominal dividend yield * 80%), which restores the “net cash return actually received” by domestic investors, and then matches it against the A-share dividend yield. In this report, we set the certainty-based safety margin for allocating offshore assets as the near-5-year volatility midpoint of HKD versus RMB (4%) * 0.2 (i.e., 0.8%), which is used to hedge against RMB exchange-rate fluctuations, offshore liquidity discounts, and cross-border settlement time costs. When the net dividend spread breaks through this critical point, the underlying’s attribute shifts from an “asset driven by foreign investor sentiment” to a “bond-like allocation asset” with absolute return appeal. At that time, the high dividend spread after dividend tax not only provides a very strong downside risk cushion, but also becomes the fundamental driver that forces southbound capital to rotate systematically, compelling the AH premium to converge toward intrinsic value.

Explanation of the calculation for the certainty-based safety margin: Hong Kong dollar versus RMB near-5-year volatility midpoint (4%) * 0.2. This means we only pay the dividend spread cost for the “most likely mild appreciation,” while treating large-scale FX fluctuations (such as dramatic appreciation exceeding 1x volatility) as “systemic risk,” and covering it through dynamic rebalancing rather than reserving the spread.

…

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

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

We select targets with 2025Q3 ROE (TTM) > 10% and achieving continuous three-year ROE growth, as well as those with AH premiums ranking toward the front. This step aims to anchor the “endogenous stability” of core assets. In the context of global geopolitical and macro-cycle fluctuations, companies that can maintain ROE expansion for three consecutive years prove they have extremely strong industry pricing power and business resilience. This sustained upward earnings curve forms the most solid defensive base for the stock price, eliminating “value traps” where the premium is passively inflated due to fundamental deterioration.

…

4

Three variables affecting the AH premium in 2026

1. “Second-round pricing” under energy inflation pressure: premium convergence for resource-sector stocks

High oil prices are directly beneficial to the energy and raw-material sectors among dually listed AH stocks (such as PetroChina, CNOOC, and China Aluminum). But in terms of AH premium performance, it shows an interesting feature of “H shares stronger than A shares” (the AH premium margin narrows).

Hong Kong, as an offshore market extremely sensitive to global commodity pricing, typically repairs valuations in its resource sectors earlier and more thoroughly than A shares. With oil prices supported above $90, global long-term capital is more inclined to look for defensive assets in discounted H shares.

This earnings upgrade induced by geopolitics will drive southbound capital to accelerate buying of discounted energy H shares. Under the impact of geopolitical conflict, the energy sector’s premium rate may undergo an active contraction, and even some high-quality energy stocks could reach historically lower premium levels.

2. Reduced expectations for Fed rate cuts: “valuation suppression” from offshore liquidity

The Federal Reserve maintaining resilience in the 3.5%–3.75% interest-rate range is beyond the market’s expectations at the beginning of the year. This is a notable negative factor for Hong Kong stocks (H shares) overall.

The postponement of rate-cut expectations means that the denominator side of Hong Kong stocks (the discount rate) cannot decline as scheduled. When U.S. Treasury yields remain volatile at high levels, the liquidity environment for Hong Kong stocks stays in a “tight equilibrium” state. By comparison, A shares are mainly driven by domestic monetary policy (currently relatively independent and leaning accommodative), and are less affected at the margin by the Fed.

For growth stocks highly sensitive to interest rates—such as Hang Seng TECH and biotech/pharmaceuticals—when rate-cut expectations fail to materialize, the rebound in their H shares will face obstacles, while A shares may be more stable due to domestic policy support. As a result, AH premiums for growth sectors in the short term may not contract; instead, they may face a partial rebound or remain in a high-level, range-bound pattern.

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

Stagflation worries brought by high oil prices (high inflation + low growth) cause global risk appetite to retreat. In this context, “dividend/benefit assets” with very high certainty become a haven for the entire market.

The large financials and utilities sectors among dually listed AH stocks originally benefited from expectations of dividend tax relief. Now, with the additional uncertainty from high oil prices, capital will further concentrate on defensive stocks with stable cash flows.

This is a two-way contest. On the one hand, high interest rates suppress the overall valuation of Hong Kong stocks; on the other hand, risk-off capital is seeking very high dividend yields in H shares. The ultimate outcome could be: AH premiums for high-dividend sectors entering a “low-level dulling” state—i.e., premiums are already very low, but because external liquidity does not loosen, H shares also cannot achieve the final step of “parity premium,” and remain in a modest discount band.

Risk warning

Geopolitical conflict disruptions, the slowdown in U.S. economic growth, a decline in global risk appetite, and overseas demand not meeting expectations

(Source: Great Wall Securities)