Alibaba stock rally creates arbitrage room amid widest gap between Hong Kong and New York prices

The gap between Alibaba’s shares in Hong Kong and New York on July 21 was the widest since its secondary listing in November

Investors have switched into more than 57 million Alibaba shares in Hong Kong over the past eight months, according to exchange data

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Published: 6:15pm, 22 Jul 2020Updated: 2:14pm, 20 Oct 2020

Investors are expected to exploit the widest price gap in Alibaba Group Holding shares, after a rally in Hong Kong drove its valuation above those listed in New York. The opportunity, though, may be fleeting in a volatile market.

The e-commerce giant’s equity has gained 22.6 per cent this month through July 21. Its American depositary receipt, whose value is equivalent to eight Hong Kong-listed shares, rose by 19.6 per cent in the same period.

An investor who exchanges the ADRs at the equivalent of HK$249.88, based on overnight closing prices in New York, could them sell them on in Hong Kong for HK$254.80 each, assuming no transaction costs.

As both instruments are fungible, ADR holders would need to switch into local shares before they can exploit the 2 per cent price differential in Hong Kong, a trade known as arbitraging in stock market parlance.

Jack Ma, China’s richest man, controls about 50 per cent of the voting interest in Ant Group. Photo: EPA-EFE

“The price gap will lead investors to do the arbitrage trade,” said Louis Tse Ming-kwong, managing director of VC Asset Management. “Investors who have bought Alibaba in the US since its listing in 2014 will find it is a good opportunity to shift into Hong Kong shares now.”

The bounce in Alibaba shares follows an emphatic rally in its stock after an announcement by Ant Group, the operator of the Alipay payments system valued at US$200 billion, about concurrent stock offerings in Shanghai and Hong Kong.