An amazing turnaround in fortunes as China’s stock market goes from the world’s worst to best in a matter of months

Hong Kong equity investors must be looking enviously across the border this year.

The city’s two main benchmarks are hardly doing badly, but gauges on the mainland – after a grim 2018 – are eclipsing them and just about every other worldwide. The ChiNext in Shenzhen has led the charge with a 42 per cent rally. This renewed enthusiasm for yuan-denominated stocks means the Hang Seng Index is underperforming the Shanghai Composite Index by the most in a year.

The gap in performance has widened enough to make A shares pricier than stocks in Hong Kong for the first time since October. Cheaper valuations are starting to encourage some mainland traders to look south for bargains, but onshore shares should still outperform thanks to foreign inflows and favourable policies, analysts say.

“If you want to get the best Chinese exposure, A shares are still the best you can get, given that MSCI is gradually increasing the weight of the domestic shares,” said Hao Hong, head of research at Bocom International Holdings. “A shares should outperform Hong Kong stocks throughout 2019.”

Mainland stocks have gone from the world’s worst last year to the best now: the Shanghai Composite Index tops the list of major equity gauges with a 23 per cent gain. That’s about twice the advance of the Hang Seng Index, while a Hong Kong gauge of Chinese companies is up 13 per cent year to date.

Average daily stock turnover in Hong Kong is still less than 2018, when US$544 billion was wiped from the value of the city’s equities. Daily turnover on the mainland has surged by more than a third and is at the highest since 2015, topping 1 trillion yuan (US$150 billion) four times last week and again on Tuesday.