Chinese ADR flow to Hong Kong grows amid regulatory offensive

The migration of US-listed Chinese companies to Hong Kong is accelerating as regulators on both sides of the world have stepped up their oversight in recent months.

Chinese tech stocks in the United States have wiped $ 1 trillion from their value since their peak in February. The offensive culminated in the announcement by Didi Global Inc. earlier this month of plans to withdraw from the Nasdaq, just six months after its debut on the US stock market.

The declines accelerated on Wednesday following news that the Biden Administration is considering imposing tougher sanctions on China’s largest chipmaker, according to people familiar with the situation. The Nasdaq Golden Dragon China Index fell to its lowest level since March 2020.

50% of Alibaba Group Holding Ltd.’s free float is now in Hong Kong, up from 30% a year ago, according to a Barclays note written by analysts including Jiong Shao. Baidu Inc.’s free float in Hong Kong has also increased from around 80% to 82.7% in the past six months, the note says.

Representatives for Alibaba in the US did not respond to messages requesting comment.

“We expect that many, if not most, investment institutions will shift their holdings and operations to Hong Kong-listed stocks from US-listed stocks, in order to minimize the impact of delisting risks. ”Louis Lau, portfolio manager at Brandes Investment Partners, said in an interview.

Many of the China-based companies that are listed in the United States, such as JD.com Inc. and NetEase Inc., already have a secondary or double listing in Hong Kong, which allows investors to convert their shares between the markets in question. days.

The daily trading volume of these companies in Hong Kong remains relatively low, but will increase over time along with liquidity, according to Vivian Lin Thurston, portfolio manager at William Blair Investment Management.

However, not all US funds or retail investors are able to invest in Hong Kong due to high costs and restrictions on foreign ownership of shares.

For example, US institutional investors own 22% of Alibaba shares, and 5% of that figure is held by investors who cannot buy Chinese shares off US exchanges, according to Goldman Sachs.