


Image Credit: Bloomberg
Donald Trump's efforts to limit U.S. investments in China are testing the once-close financial connection between Chinese stocks traded in New York and Hong Kong. Last week, Alibaba’s U.S. shares were trading at an average 2.1% discount compared to their Hong Kong counterparts — the largest gap since 2022. A similar trend was seen with Baidu and NetEase, whose U.S. shares were at their lowest relative price against Hong Kong shares in five months.
This divergence follows Trump’s directive in February to tighten scrutiny on pension funds' investments in Chinese stocks, and it could signal a trend as the U.S. president adopts a more confrontational approach toward China. Despite arbitrageurs' incentives to maintain price alignment across the two markets, investor behavior may diverge, especially if U.S. institutions face regulatory pressure to sell shares, while investors in Hong Kong remain optimistic about opportunities in AI. This dynamic points to a potential long-term financial decoupling between the U.S. and China.
“If U.S. policies force certain investors to sell Chinese stocks, especially those in ADRs, we could see persistent sell-offs in ADRs, while Hong Kong stocks may remain relatively unaffected,” said Winnie Wu, chief China equity strategist at BofA Securities. Although a surge in ADR prices last Wednesday, following Beijing's economic growth goals, temporarily closed the discount gap, it could widen again if Trump's policies become more aggressive.
This scenario echoes 2022, when rising U.S.-China tensions led to concerns about Chinese companies possibly delisting from U.S. exchanges. During that period, Alibaba’s U.S. shares were frequently trading at a discount to Hong Kong shares, with the gap reaching nearly 8% at its peak. While the risk of delisting has decreased after the U.S. gained greater access to Chinese company audits, investors are still wary, with a significant portion of Alibaba's shares now held in Hong Kong.
Over the long term, Chinese shares in New York and Hong Kong have generally been priced similarly due to their interchangeability. The five-year average discount for Alibaba ADRs is just 0.1%. Some investors had downplayed U.S.-China tensions, buoyed by optimism surrounding China's tech sector. However, Trump’s “America First Investment Policy” memo, which questions the legal structure behind many Chinese listings in the U.S., has added uncertainty.
While U.S. investors are pulling back from ADRs, Hong Kong shares continue to benefit from strong demand from mainland investors, with southbound flows reaching HK$302 billion ($38.9 billion) this year. If U.S. scrutiny on Chinese listings intensifies, the gap between U.S.-listed and Hong Kong-listed shares could continue to widen, leading to a shift in liquidity and investor interest toward Hong Kong.
Paraphrasing text from "Bloomberg"all rights reserved by the original author