Dual-Listed ADRs + Hong Kong Shares (June 17, 2022)

Including the ADRs in Stock Connect will be a big deal

In case you missed it, Hong Kong is working towards adding dual-listed ADRs to the Stock Connect Southbound Trading scheme. It will be a big deal if mainland Chinese investors are allowed to trade these names. Here is some background:

• China still has strict capital controls in place, prohibiting unauthorized money flows into and out of the country.

• Though Hong Kong is part of China, Chinese investors could not easily trade Hong Kong stocks until the launch of Stock Connect in 2014.

• Today, Stock Connect Southbound Trading allows the Chinese to trade 547 of the 2578 stocks listed on the Hong Kong Stock Exchange (21% of the total).

• Southbound Trading accounts for 20% of Hong Kong’s trading volume today. The flow has been concentrated on the so-called “new economy” stocks, i.e. Internet, bio-tech, advanced manufacturing etc.

• In recent years, around 20 Chinese ADRs have been dual-listed* in Hong Kong, in order to mitigate the de-listing risk from the U.S. Another 80-90 ADRs are eligible for Hong Kong listings as well, but they have yet to do so.

• The dual-listings are not part of the Southbound Trading program, and they lack the liquidity that’s much needed to support the share price.

* The technical terms are primary dual-listing and secondary listing.

Implications: