In Historic Shift, MSCI China Close to Erasing Shanghai Gap

  • MSCI index has been cheaper than Shanghai since at least 1997
  • Offshore Chinese shares have trumped mainland peers this year

The premium of Shanghai shares over the nation’s offshore traded stocks is close to being wiped out for the first time in at least two decades.

The MSCI China Index trades at 17.4 times reported earnings, compared with 17.5 for the Shanghai Composite Index. The gap is the narrowest since July 2014, just before a rally in mainland equities swelled valuations to twice that of offshore shares. MSCI’s gauge hasn’t been more expensive than Shanghai’s since Bloomberg started tracking the data in 1997.

The MSCI China has had a head start this week, with mainland markets closed for holidays. Optimism that Beijing policy makers will ease monetary policy has helped drive the offshore gauge up 4.2 percent, while Shanghai stocks are likely to catch up when markets reopen on Monday.

Still, the the narrowing gap shows how much better offshore shares have been doing: the Shanghai Composite’s 7.9 percent gain this year is dwarfed by the MSCI China’s 47 percent surge. While mainland equities are still in the shadow of 2015’s boom-bust, overseas investors can’t seem to get enough of the nation’s shares -- especially index heavyweights Tencent Holdings Ltd. and Alibaba Group Holding Ltd.

Heavy buying of Hong Kong stocks by mainland investors this year also shows that China’s efforts to open its equity markets through exchange links are mostly benefiting shares listed in the former British colony, rather than encouraging net inflows.

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