ETF’s cross-border link boosts China’s global market integration

The Shenzhen Stock Exchange in Futian District, Shenzhen, South China’s Guangdong Province, August 21, 2021. / VCG

The Shenzhen Stock Exchange in Futian District, Shenzhen, South China’s Guangdong Province, August 21, 2021. / VCG

Editor’s Note: Matteo Giovannini is a finance professional at the Industrial and Commercial Bank of China in Beijing and a member of the China Task Force at the Italian Ministry of Economic Development. The article reflects the views of the author and not necessarily those of the CGTN.

China’s efforts to elevate the status of its domestic financial market and make the country a global financial superpower likely peaked in 2021 due to a series of decisions aimed at securing a higher level of inward foreign investment and to create the conditions to become the nation’s capital. more integrated market with the rest of the world.

On December 28, 2021, the Singapore Stock Exchange (SGX) and the Shenzhen China Stock Exchange (SZSE) signed a memorandum of understanding to establish an exchange-traded fund (ETF) link that offers investors more options and allows the respective issuing local ETFs to exploit cross-border capital flows.

Even though the two exchanges did not provide a timeline for the launch, the link is expected to make Singapore another major market to have a cross-border trading system with the Chinese mainland after the Hong Kong Special Administrative Region and London.

The news comes at a time of increased openness of the Chinese financial market to the rest of the world. Last month, the Shanghai, Shenzhen and Hong Kong stock exchanges and the China Securities Depository and Clearing Corporation agreed to add ETFs to their equity connection programs. The Chinese securities regulator also announced plans to expand the Shanghai-London Stock Connect to include capital markets in Germany and Switzerland.

Timing plays a key role in analyzing the strategic importance of the announced move to a cross-border ETF link between Shenzhen and Singapore.

People walk through the headquarters of Singapore Exchange Ltd. (SGX) in Singapore, February 17, 2021. / Getty

People walk through the headquarters of Singapore Exchange Ltd. (SGX) in Singapore, February 17, 2021. / Getty

The two exchanges announced their rapprochement a day before the 17th meeting of the China-Singapore Joint Council for Bilateral Cooperation, in which Chinese and Singaporean government officials celebrated three decades of diplomatic ties between the two countries, demonstrating a connection high-level strategic and economic, as well as the common intention to develop cooperation in capital market products through improved cross-border connectivity.

From a broader perspective, this move can be seen as a clear example of how the geography of financial markets is rapidly changing with a shift in power from the West to the East. This is mainly due to the recalibration of China’s focus from reduced dependence on US capital markets to establishing a deeper level of financial cooperation with Asian and European financial centers by leveraging infrastructure and trade pacts such as the Belt and Road Initiative (BRI) and the Regional Comprehensive Economic Partnership (RCEP).

The introduction of a cross-border ETF program is good news for institutional investors due to the golden opportunity to gain direct exposure to the Chinese domestic market through a financial instrument that is widely present in the portfolios of investors because of its unique characteristics of high liquidity. , high diversification, low risk and moderate management fees.

It’s also important to stress that establishing a new link is not the ETF’s previous cross-border initiative that China has agreed with foreign countries. The launch of a cross-border ETF Connect program between the Japan Exchange Group, the Shanghai Stock Exchange and the Shenzhen Stock Exchange in 2019 and the memorandum of understanding between the Shanghai Stock Exchange and the Korea Stock Exchange for the launch of a cross-border program ETFs announced in May 2021 are strong examples of China’s long-standing commitment to creating a more accessible domestic market for foreign investors.

In this sense, by adding a whole new link with Singapore, in addition to the ETF frameworks already established with Hong Kong, Tokyo and Seoul, the Chinese mainland can get the missing piece of a puzzle towards the full financial link between them all. the main financial hubs in Asia. This scenario clearly offers immense opportunities for investors due to the strong demand for ETFs in Asia and the growing role the region is playing as a global ETF hub.

A final aspect that I think is important to take into account is the contribution that Shenzhen can offer in the ETF’s cross-border link since the city, a world-class technological hub with a highly qualified workforce, has already gained years of valuable experience through a Stock Connect Program with Hong Kong while playing a central role in the development of the Great Bay region. The fact that Singapore is not only a global financial center but also a leading technological innovation hub could turn the agreement with Shenzhen into a perfect combination by providing capital to the respective ecosystems of highly innovative small and medium enterprises and, of in this way, put financial services in the best conditions to support the real economy.

All things considered, increased connectivity between China and the rest of the world not only shows the country’s desire to become a more active and responsible participant in the global financial arena, but also demonstrates that integration and inclusiveness are the only ones. components that create the conditions for a mutually prosperous economic environment.

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