Alibaba’s Sudden ADR Discount Shows Fear of US-China Decoupling

Donald Trump’s Push to Restrict US Investments in China Tests Financial Link

Donald Trump’s push to restrict US investments in China is testing what in theory should be an ironclad financial relationship – the tight link between Chinese shares trading in New York and Hong Kong.

Arbitrageurs Face Incentives to Keep Prices in Line

Alibaba Group Holding’s US shares traded at an average 2.1% discount to those in Hong Kong last week – at one point reaching the widest since 2022. A similar pattern appeared for Baidu and NetEase, with their American depositary receipts (ADRs) trading at their cheapest against Hong Kong peers in five months.

Divergence Warns of Longer-Term Trend of Financial Decoupling

The divergence, which follows Trump’s Feb 21 directive to tighten scrutiny of pension funds’ investments into Chinese stocks, is an aberration that some analysts warn could become more common as the US president takes an increasingly hawkish stance towards China.

Investors May Face Regulatory Pressure to Sell

While arbitrageurs have strong incentives to keep prices in the two markets aligned, investor flows can vary dramatically if US institutions face regulatory pressure to sell at a time when counterparts in Hong Kong are buying on optimism over the artificial intelligence boom. It points to what could become a longer-term trend of financial decoupling between the world’s two largest economies.

Experts Weigh in on Implications

"If any US policy requires certain types of US investors to divest their holding in certain Chinese stocks, and as US investors’ positions are more concentrated in ADRs, ADRs could see persistent flow-selling," said Winnie Wu, chief China equity strategist of BofA Securities in Hong Kong. "Hong Kong shares could be relatively immune."

Market Trends and Outlook

While a midweek surge in ADRs – following Beijing’s forceful economic growth goal and a promise to prioritise consumption – has reduced their discount for this week, the gap could widen should Trump amp up his tough stance against China.

Conclusion

The divergence in Chinese shares trading in New York and Hong Kong serves as a warning sign for what could become a longer-term trend of financial decoupling between the world’s two largest economies. As tensions between the US and China continue to escalate, investors would do well to pay close attention to this development and its potential implications for the global markets.

Frequently Asked Questions

Q: What is the significance of the divergence in Chinese shares trading in New York and Hong Kong?
A: The divergence is a warning sign of a longer-term trend of financial decoupling between the world’s two largest economies.

Q: What is the potential impact of Trump’s push to restrict US investments in China on the financial markets?
A: The push could lead to a sustained dislocation between ADRs and Hong Kong-listed shares, with broader market implications including a continued shift of liquidity and investor focus towards Hong Kong.

Q: How do experts view the potential implications of Trump’s "America First Investment Policy" memo on the financial markets?
A: Some experts warn that the memo could lead to a continued shift of liquidity and investor focus towards Hong Kong, while others believe that the market will adapt to the new reality.