(Bloomberg) — 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.
Most Read from Bloomberg
Alibaba Group Holding Ltd.’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 Inc. and NetEase Inc., with their American depositary receipts trading at their cheapest against Hong Kong peers in five months.
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 toward China.
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.
“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.”
While a Wednesday surge in ADRs — following Beijing’s forceful economic growth goal and a promise to prioritize consumption — has reduced their discount for this week, the gap could widen should Trump amp up his tough stance against China.
Read: China Sets Bullish Growth Goal of About 5%, Despite US Tariffs
Investors are reminded of the episode in 2022, when bilateral tensions pushed Chinese firms to the brink of a mass delisting from US exchanges. That year, Alibaba’s shares in New York traded at a discount more frequently than at a premium to those in Hong Kong, at one point widening to nearly 8%.
Delisting risks have eased after US auditors were granted greater access to Chinese firms’ documents, but that hasn’t dissuaded investors from hedging their bets. Around 69.11% of Alibaba’s shares were circulating in Hong Kong’s clearing and settling system as of Tuesday, according to exchange data, as holders shifted holdings into the financial hub. That’s up from 66.88% a year ago.
