Chinese and Saudi Exchanges Gear Up for ETF Cross-listings

The Lede: Citing sources familiar with the matter, Reuters reported on Friday that stock exchanges in China and Saudi Arabia are in talks to allow cross-border listings of exchange-traded funds (ETFs) as the two countries continue to deepen financial ties and strengthen diplomatic relations.

What We Know:

• The Shenzhen Stock Exchange, one of the two major stock exchanges in mainland China, and the Saudi Tadawul Group, which is the Saudi Stock Exchange’s operator, are in talks to move forward on a program called ETF Connect. The cross-listing of ETFs will allow investors in China and Saudi Arabia to trade funds tracking specific stocks or bond indexes listed on each other's stock exchanges.
• Some of China's biggest ETF operators have been notified in recent months about the potential for a cross-border listing agreement with Saudi Arabia. Hong Kong Exchanges and Clearing Ltd (HKEX) is also in separate talks with the Saudi Tadawul Group for a similar development. HKEX signed an agreement with the Tadawul Group in February this year to explore various areas of cooperation, including cross-border listings

The Background: In recent years, China has also launched 'ETF Connect' projects with offshore stock exchanges in Hong Kong, Japan, South Korea, and Singapore. Insiders have said that although some products related to these projects have proven popular, trading volumes for these have not yet reached significant levels. The ICBC CSOP FTSE Chinese Government Bond Index ETF launched by China's CSOP Asset Management in 2020 is one of the largest ETFs in Singapore and was formed under the 'ETF Connect' project. Since June, a total of 886 ETFs worth $256.8 billion were listed on the stock exchanges of China and Hong Kong. Relative to other stock exchanges, Saudi Arabia's ETF market is young and has only eight products listed. However, it is one of the biggest emerging market stock exchanges and has a $2.7 trillion capitalization.

Likely Outcomes:

• Economic cooperation between China and Saudi Arabia has been growing recently and has had a particular focus on energy. Saudi Arabia's Ministry of Investment has signed a $5.6 billion deal with Chinese electric car maker Human Horizons to collaborate on the development, manufacture and sale of vehicles. In March, the Saudi public petroleum and gas company Aramco increased its multi-billion dollar investment in China by finalizing and upgrading a planned joint venture in the Liaoning Province of northeastern China and acquiring expanded stakes in privately controlled petrochemical groups. Energy will likely continue to be a cornerstone of bilateral cooperation between Beijing and Riyadh, but both countries have sights on diversifying their partnership.
• Although it is anticipated to start with niche and small offerings, this move to have mutual ETF listings between stock exchanges could represent an important step in shoring up ties in trade and investment. As it stands now, China is Saudi Arabia's top trading partner with trade worth $87.3 billion in 2021. It remains to be seen whether Saudi investors will show demand for the China market, especially as the U.S. is increasingly closing doors to investments in that direction. The same souring relationship with the U.S. may be another reason that Chinese investors turn to other opportunities. Investing in Saudi Arabia, one of Washington’s most important allies, may be both an economic and geopolitical opportunity for Chinese entities.

Quotables:

“The local investors’ knowledge of the market under the scheme will also be key before any investment.” - Jackie Choy, director of passive investment ratings for Morningstar Asia

Good Reads:

Exclusive: China, Saudi in talks for ETF cross-listings to bolster financial ties (Reuters)

China and Saudi Arabia in talks to cross-list stock markets: Report (Middle East Eye)