In the U.S. stock market, many investors encounter a concept that appears familiar yet is often misunderstood—ADR.

Companies such as Alibaba, Pinduoduo, and NIO trade in the U.S. through ADRs, while the ADRs of Tencent, Meituan, and BYD are only available in the OTC market. Although these securities may look similar on the surface, they are built on very different institutional arrangements. Understanding ADRs and ADSs not only helps investors distinguish the trading characteristics of different Chinese companies, but also provides deeper insight into cross-market pricing mechanisms.

Why Can’t Foreign Companies List Directly in the United States?

From a regulatory perspective, U.S. capital markets impose stringent legal and disclosure requirements on listed entities. In principle, a listed company must fully comply with U.S. corporate law and securities regulations.

For most non-U.S. companies, choosing a “direct listing” often means establishing a U.S.-registered corporate entity, accepting a higher level of regulatory scrutiny, and bearing more complex tax and legal obligations. This process is not only time-consuming but also significantly more costly than listing in offshore jurisdictions.

Against this backdrop, the U.S. financial system developed the depositary receipt framework, allowing foreign companies to access U.S. capital markets without fully transforming themselves into U.S. corporations.

What Is an ADR?

ADR stands for American Depositary Receipt. It is not the company’s original share, but a financial instrument issued in the United States, denominated in U.S. dollars, and traded on U.S. markets.

The core mechanism works as follows: a foreign company’s shares are held in custody by a local custodian bank, while a U.S. depositary bank issues ADRs based on those shares at a predetermined ratio. What U.S. investors trade is not the overseas stock itself, but a receipt representing the underlying equity interest.

From an investor’s perspective, ADRs trade much like U.S. stocks. Trading, dividend payments, and tax treatment are all handled in a U.S.-friendly manner, greatly reducing the operational barriers of cross-border investing.

What Role Does ADS Play?

Compared with ADRs, ADS is a more structural concept. ADS, or American Depositary Share, represents the actual equity interest underlying an ADR.

In simple terms, ADS is the real “share unit,” while the ADR is the marketable certificate that represents those shares in the U.S. market. Investors trade ADRs in the secondary market, but the economic rights ultimately correspond to ADSs and the underlying ordinary shares.

In practice, one ADR may represent one ADS, multiple ADSs, or even a fraction of an ADS. The ratio is determined at issuance, primarily to ensure that the ADR price aligns with U.S. market trading conventions.

What Is the Fundamental Difference Between ADRs and ADSs?

In essence, ADSs are closer to the stock itself and serve as the unit of equity ownership, while ADRs are financial instruments designed to standardize and package those ownership rights for U.S. market trading.

From a trading standpoint, investors buy and sell ADRs, whereas ADSs mainly exist within custody, clearing, and registration systems. Together, they form the complete structure that allows foreign equities to circulate in U.S. markets.

Why Do Some Chinese ADRs Have Different “Levels”?

Looking at Chinese stocks in the U.S. market, ADRs generally fall into two categories.

One category consists of ADRs that have completed the full U.S. listing process and are officially traded on the NYSE or Nasdaq. These securities tend to have better liquidity, disclosure standards comparable to U.S. listed companies, and strong participation from institutional investors.

The other category includes ADRs traded on the OTC market. These companies are not listed on U.S. exchanges, and their ADRs primarily serve as a trading access channel for overseas investors. As a result, trading volume is often limited, and prices can be more sensitive to market fluctuations.

This explains why the ADRs of Tencent, Meituan, and BYD differ significantly in liquidity and market positioning from those of Alibaba or Pinduoduo.

How Do Prices Interact Between Hong Kong Stocks and ADRs?

Taking Tencent as an example, its Hong Kong–listed shares represent the company’s primary listing and core pricing market. Its ADRs largely reflect the Hong Kong share price in the U.S. market.

In most cases, price movements originate in Hong Kong and are subsequently mirrored by the ADRs. However, this relationship can temporarily reverse when information disclosure timing changes. In recent years, many companies have released earnings or major announcements after the Hong Kong market closes, making the U.S. trading session the first venue where new information is fully digested.

Under such circumstances, ADR price movements may reflect market sentiment in advance and influence the opening price of the Hong Kong shares on the following trading day.

Final Thoughts: ADRs Are Not Just Tools, but Signals

From an institutional perspective, ADRs and ADSs were designed to lower the barriers to cross-border investment. In real market operations, however, they have evolved into critical bridges connecting different markets and time zones.

When price discrepancies arise across markets for the same company, they are rarely a simple matter of overvaluation or undervaluation. Instead, they usually reflect differences in liquidity, information timing, and investor composition.

Understanding ADRs is, at its core, about understanding how global capital prices the same company across different markets.