After the downdraft in the Chinese stock market this month, investors are finally lifting their heads and beginning to look for bargains amid the rubble. However, they’re not putting their money into the A-shares trading in Shanghai or Shenzhen, but instead bargain shopping in Hong Kong.

Hong Kong Stock Exchange board
Hong Kong Stock Exchange board

Due to a long-standing market distortion, the average share price of a Chinese company listed on both the mainland and Hong Kong exchanges is trading about 40% lower in Hong Kong.

The Hang Seng China Enterprises Index now trades at an average price-to-earnings (PE) ratio of slightly more than 6, much cheaper than broader Asian markets, which trade around 13, and the cheapest the HSCE has traded since December 2001, reported Reuters.

The index is also trading below book value, meaning the average company’s shares are pricing the business below its accounting value.

“Investing in Hong Kong stocks is the right choice, because the Hang Sing’s current valuation is near historic lows; the kind of opportunity which has generated handsome returns previously,” Zhu Haifeng, a 31-year-old investor in Hubei province, in central China told Reuters.

The E Fund Hang Seng China Enterprises Index ETF, an onshore exchange-traded fund managed by a quota system tracking the HSCE, has seen assets under management jump 15% during the period to 5.7 billion yuan this year, reported Reuters.

The two markets see price differences because China’s has a closed market dominated by domestic retail investor, while Hong Kong accepts international money managers and follows global capital markets.

Beijing’s attempts to prop up the onshore markets after they crashed last summer, has put an artificial floor under the market when many company share prices were still extremely expensive compared with international peers.

This means, that even after falling nearly 50% from summer peak, the average company listed on the ChiNext growth board in Shenzhen is still priced at more than 60 times earnings, compared with around 20 for the Nasdaq 100.

On Thursday, Hong Kong’s Hang Seng Index rose 0.8% to 19,196 and the Hang Seng China Enterprises Index added 0.9% to 8,029. On the mainland, the Shanghai Stock Exchange Composite Index fell 2.9% to 2,656 and the Shenzhen Stock Exchange Composite Index sank 4.2% to 1,629. The Chinext Price Index, which tracks small stocks dropped, 4.6% to 1,906.