One Bank, Two Prices: Why I Buy the Cheaper One
Bank of China pays one dividend, and I can buy the company in two places at two prices. The gap is not a mispricing waiting to close. It is the design, and it decides where my income book sits.
A friend of mine in Shenzhen asked me yesterday how I invest in China. Bank of China’s Hong Kong listed shares had closed that afternoon at HKD 5.235. Its Shanghai shares closed at RMB 5.750, or HKD 6.684. I told him the current premium for holding the mainland listed version was 28 per cent over the Hong Kong equivalent.
“That cannot be right!” he said.
He knew of the CSI 300 mainland stock index. He also knew that Hong Kong had its own exchange. What he did not know is that a Chinese company can trade on both exchanges at two very different prices.
We ended up spending a long time on why the premium gap exists and why I chose to invest via Hong Kong instead of the mainland.
The price difference across two cities
Bank of China is 3.2 per cent of my income book and one of its largest single positions. The Shanghai shares are priced in RMB and owned almost entirely by people living on the mainland. The bank’s Hong Kong shares are priced in Hong Kong dollars and accessible to anyone with a brokerage account. The two share classes are called A- and H-shares.
Bank of China declared a dividend of RMB 0.2263 per share for 2025 and pays it to every shareholder. An investor in Shanghai pays 27.7 per cent more than I do for the same dividend, which is why my yield is 5.02 per cent and theirs is 3.94.
Given that I have a choice, I own the shares listed in Hong Kong.
With a gap that size, the obvious trade is buy the cheap one, short the expensive one, wait. I know, because I thought about doing exactly that in 2020. The gap has refused to close for twenty years, through crashes, reforms and a pandemic. Whatever holds it open is stronger than my bright idea.
Why there are two prices
I knew none of this when I bought my first Chinese stock in 2018. What confused me first was the availability of China ETFs: CSI 300, MSCI China, MSCI China A-Shares, MSCI Hong Kong, all claiming to be the same country. They are not, because China has two stock markets with two different histories.
Both cities’ broker associations were founded in 1891. Shanghai closed in 1949 and stayed shut until 1990; Hong Kong kept trading the whole time. When Shanghai finally reopened, its job was to raise money from mainland savers for state-owned companies.
Hong Kong was already a common-law market with its own currency, its own regulator and access to global capital, and from 1993 mainland companies could list there too, starting with Tsingtao Brewery. But mainland savers were not allowed to follow their companies abroad. That split is the whole story: one company, two pools of money that cannot mix, and thus two prices. The four ETFs on my broker's list were just the split showing up in my account.
The door Beijing built, and who gets through it
In 2014 Beijing opened Stock Connect between the two markets. Since then, a mainland investor has been able to buy Hong Kong listed shares through a mainland broker while I can use the same gateway to buy mainland listed shares. One would have expected this mechanism to have narrowed the premium gap, but it has not.
Mainland investors buying Hong Kong stock this way never transfer money out of the mainland; the trade settles at home in RMB, through the mainland clearing house. I have never used the gateway the other way myself as my orders go straight into the Hong Kong stock exchange. Unfortunately, not every mainland investor can place such orders.
Mainland investor: I want to buy the cheap Hong Kong shares too.
Stock Connect: Show me RMB 500,000 across your accounts, averaged over 20 trading days.
Mainland investor: I have RMB 80,000.
Stock Connect: Then you’re bidding in Shanghai.
That excludes most retail accounts, which make up most of the trading in Shanghai.
Due to these restrictions, a large pool of household savings is stuck bidding only for mainland listed shares. Bank of China’s H-shares, on the other hand, are priced by international investors weighing the bank against every other major banking stock.
Hang Seng maintains a premium index comparing the two markets. On 7 August it showed that 128 of the 155 eligible dual-listed pairs had their Hong Kong shares trading more than 20 per cent below the mainland ones, with another 16 between 10 and 20 per cent below. In this index, 100 means the two share prices are the same. It closed at 122.52, meaning mainland shares were about 22.5 per cent more expensive on average. Bank of China’s own pair was 127.7.
The index had fallen about 12 per cent over the previous year, which I have benefitted from as the gap has narrowed. AAStocks keeps a live table of every pair, which is the quickest way to see how far the gap stretches beyond the banks.
Who sets the Shanghai price, and how long they hold
The average Shanghai account holds a stock for 40 days; institutions hold for 109. I have held Bank of China for more than two years and kept adding on selloffs. Individuals do about 85 per cent of the trading there, so the A-share price is mostly set by people who will be gone before the next dividend arrives. I do not read that price as a verdict on the bank. I read it as a weather report. Hong Kong's last count put institutions at 53 per cent of turnover and retail at 20. The data is old, but I doubt it has changed much.
Then there’s the national team. The big one is Central Huijin, a state-owned entity that also happens to be Bank of China’s controlling shareholder. By mid-2025 it held RMB 1.28 trillion (~US$190 billion) of mainland funds, and it calls itself an equalisation fund. As far as I can tell, the national team only buys on the mainland.
A premium between two share classes isn’t unique to China. Rio Tinto has the same setup between its London and Sydney listings: Australian shareholders get a tax credit London holders can’t use, so the Sydney shares trade roughly 25 per cent higher. The difference is that in China, Beijing holds nearly every lever. It writes the rules, owns the bank, sponsors the index, is the largest buyer, and decides whether mainland savers are allowed to cross the border and close the gap themselves.
The ten per cent tax I never see
Every year the dividend lands in my brokerage account already 10 per cent light. I have never filed a mainland tax form in my life. The bank does the withholding for me, and says so in every dividend announcement, buried in a long sentence about individual income tax. So the 5.02 per cent gross arrives as roughly 4.5.
If I buy the A-shares through the northbound Stock Connect, 10 per cent comes off there too. Tax falls on both sides of the same dividend and leaves the 27.7 per cent gap standing. The same tax code is also one reason the gap stays open.
A mainland individual buying these same H-shares through the southbound Stock Connect has 20 per cent withheld, twice what I pay on the identical dividend, while holding the Shanghai line onshore for more than a year costs nothing. Beijing’s tax code is telling my friend to stay in Shanghai. He listens.
The scoreboard that does not count my shares
The index many call China’s S&P 500 is the CSI 300, but it holds mainland shares only. I hold a CSI 300 ETF myself in the growth sleeve, so yes, some of my own money is parked on the expensive side of the gap I just spent several paragraphs complaining about. The income book sits on the cheap side. Both get called China exposure.
The newer CSI A500, launched in September 2024, does not close the premium gap either, and the two big foreign index providers cannot agree on how much of the mainland market counts in the first place: MSCI weights A-shares at 20 per cent of their full size, FTSE Russell at 25.
Choosing an index is a second venue decision, and most investors make it without noticing. I wrote about ending up on the wrong side of it in I Own the Wrong Index, Not the Wrong Businesses. It is also why I built my own way to benchmark the portfolio instead of leaning on a single index.
The five questions I run before I buy a Chinese company
I settle the venue first by asking myself these questions:
Which exchange am I on?
Who is the marginal buyer?
What reaches me after withholding tax?
Which major index is the company part of?
Which regulator has jurisdiction over my claim?
Run on Bank of China, the answers are why I bought where I did. Hong Kong, so the price I pay is set by an institution, not by one of the accounts doing 85 per cent of Shanghai’s turnover. Ninety per cent of the dividend reaches me, on today’s price about 4.5 per cent after tax. The bank sits inside the Hang Seng and outside the CSI 300. And if anything ever goes wrong, my claim runs through the SFC and Hong Kong’s common-law courts, in a language I can read and a system I mostly understand. That last one matters more to me than it probably should. As a former CFO and twenty-five years of reading filings will do that.
That settles the venue and nothing else. The business was a separate judgement, and I made mine in 2023 and 2024: four state banks, bought in Hong Kong at three to 4.5 times earnings. They now pay me 6.8 to 7.4 per cent on what I paid; anyone buying today gets 5.02, because the price rose faster than the dividend. That is the trade working. The income sleeve of my China book returned 13.8 per cent in 2024 and 25.3 in 2025, for whatever two good years are worth.
The claim on the bank is the same in both cities. What differs is everything around it: a thinner set of buyers, no state bid under the price, and border rules Beijing can loosen or tighten. I am paid to hold the more exposed position, on a dividend set by a state payout mandate. I think I am paid more than those risks are worth. I cannot prove it. The market may have the price right, in which case there is nothing to collect here beyond the dividend itself. If the gap ever closes, that is an upside I never priced in.
I monitor the premium
As we were winding up for the night, my friend asked: “What are you watching next?”
My answer was short: “How far Beijing is willing to open the door, and how fast.”
Two changes would matter. The 20 per cent withheld from mainland individuals who buy the Hong Kong shares, and the RMB 500,000 threshold that decides who may use the southbound Stock Connect.
The number I track is the Hang Seng China AH Premium Index. It closed at 122.52 on 7 August, and the 52-week low is 113.56. My rule is below 110, held through two consecutive quarter-ends before I act on it. As far as I can tell the index has not printed below 110 since Stock Connect opened in 2014, so I may be waiting years. One print does not count. If it breaks and stays broken, the design has changed, and my reason for owning the Hong Kong line goes with it.
My friend knows about the 28 per cent now. He is still bidding in Shanghai.
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As of the date of publication, I hold positions in Bank of China, China Construction Bank, Agricultural Bank of China, China Merchants Bank, Alibaba, and CSI 300 ETF. Positions may change after publication without notice. Cohong Lane is a periodical publication made generally available to the public; this is disclosure of my positions, not a recommendation to buy, sell, or hold any securities. Full disclaimer · About Philip.