(Bloomberg) -- The premium Chinese stocks have over their Hong Kong listings has shrunk, driven by a potential dividend tax waiver for equities bought in the city through a China trading link.

The Hang Seng Stock Connect China AH Premium Index, which tracks the price difference between the largest shares listed in both markets, has fallen more than seven percentage points this month. Stocks listed on mainland exchanges, known as A-shares, are now trading at around a 40% premium to their counterparts across the border, the lowest since July. 

The annual average of the gauge has climbed for four years through to 2023, as investors shunned the market, which had taken the worst of the blows from China’s crackdown on big tech as well as geopolitical tensions. 

However, the gap may be poised to narrow further with China considering a proposal to exempt a dividend tax on Hong Kong stocks. Mainland investors, who have been enthusiastic buyers of Hong Kong equities this year, may pick up more of their favorite dividend plays, rendered even more attractive if taxes are lifted.

The benchmark Hang Seng Index is on track for its third week of gains, adding as much as 2.5% on Friday. The sentiment boost comes as regulators appear to be following through in their vows to promote Hong Kong’s financial status and boost liquidity in the market.

(Adds details of Hang Seng Index movements in last paragraph)

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