Alibaba’s ADR Discount: A Sign of US-China Financial Decoupling?

(Bloomberg) — Donald Trump’s recent push to restrict US investments in China is putting to the test what should ideally be a robust financial relationship — the close connection between Chinese shares traded in New York and those in Hong Kong. Last week, Alibaba Group Holding Ltd.’s US shares were trading at an average discount of 2.1% compared to their Hong Kong counterparts, reaching the widest gap since 2022. This trend was mirrored by other tech giants like Baidu Inc. and NetEase Inc., whose American depositary receipts (ADRs) also traded at their lowest against Hong Kong shares in five months.

Impact of Trump’s Directive on Investment

The divergence in pricing follows Trump’s directive on February 21, which aims to tighten scrutiny of pension funds’ investments in Chinese stocks. Analysts warn that this could become a more common occurrence as the US president adopts a more hawkish stance toward China. While arbitrageurs typically have strong incentives to keep prices aligned across the two markets, investor flows can vary significantly if US institutions face regulatory pressure to sell, while their counterparts in Hong Kong are buying due to optimism surrounding the artificial intelligence boom.

Long-Term Financial Decoupling?

This situation highlights a potential long-term trend of financial decoupling between the world’s two largest economies. Winnie Wu, chief China equity strategist at BofA Securities in Hong Kong, stated, “If any US policy requires certain types of US investors to divest their holdings in certain Chinese stocks, and as US investors’ positions are more concentrated in ADRs, ADRs could see persistent flow-selling. Hong Kong shares could be relatively immune.”

Despite a surge in ADRs on Wednesday, following Beijing’s ambitious economic growth goals and a commitment to prioritize consumption, the discount has only slightly narrowed for this week. However, this gap could widen again if Trump intensifies his tough stance against China.

Historical Context: 2022’s Delisting Fears

Investors are reminded of the events in 2022 when rising bilateral tensions nearly pushed Chinese firms toward mass delisting from US exchanges. During that time, Alibaba’s shares in New York frequently traded at a discount compared to those in Hong Kong, with the gap reaching nearly 8%. Although delisting risks have eased after US auditors gained greater access to Chinese firms’ documents, investors remain cautious and are hedging their bets.

As of Tuesday, approximately 69.11% of Alibaba’s shares were circulating in Hong Kong’s clearing and settling system, according to exchange data. This is an increase from 66.88% a year ago, indicating a shift in holdings toward the financial hub.

Market Trends and Investor Sentiment

Over the long term, Chinese shares in New York and Hong Kong have generally been priced in tandem, reflecting the shares’ fungibility. The five-year average discount for Alibaba ADRs stands at just 0.1%. Some investors had been downplaying Sino-American tensions, buoyed by the rise of DeepSeek, which has revitalized interest in Chinese stocks. However, this optimism faced a reality check following the release of Trump’s “America First Investment Policy” memo, which raises questions about the “variable interest entity” structure that supports many Chinese listings in the US.

As the Hang Seng China Enterprises Index and the Nasdaq Golden Dragon China Index rally in tandem, the implications of these developments are significant for investors. The evolving landscape of US-China relations will undoubtedly continue to impact market dynamics and investor strategies.

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