Cross-border ETF link boosts China's global market integration

Matteo Giovannini

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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 author's views and not necessarily those of CGTN.

China's effort to elevate the status of its domestic financial market and turn the country into a global financial superpower probably reached its pinnacle in 2021 due to a series of decisions targeting guaranteeing a higher level of inbound foreign investments and creating the conditions for making the nation's capital market more integrated with the rest of the world.

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

Even though the two bourses have not provided a timeline for the launch, the link is set to make Singapore another major market to have a cross-border trading scheme with the Chinese mainland after the Hong Kong Special Administrative Region and London.

The news comes at a time of increased opening-up of China's financial market to the rest of the world. Last month bourses in Shanghai, Shenzhen and Hong Kong and the China Securities Depository and Clearing Corporation agreed to add ETFs to their stock connect schemes. China's securities regulator also announced plans to broaden the Shanghai-London Stock Connect to include capital markets in Germany and Switzerland.

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

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

The two bourses announced their tie-up a day before the 17th China-Singapore Joint Council for Bilateral Cooperation Meeting, where Chinese and Singaporean government officials celebrated three decades of the two countries'diplomatic ties, demonstrating a high-level strategic and economic tie, as well as the common intent toward the development of capital market product cooperation through enhanced cross-border connectivity.

Looking at the bigger picture, the move can be seen as a clear example of how the geography of financial markets is rapidly changing with a transition of power from the West to the East. This is basically due to China'recalibration of focus from reduced reliance on U.S. capital markets to the establishment of a deeper level of financial cooperation with Asian and European financial centers by leveraging infrastructures and trade pacts such as the Belt and Road Initiative (BRI) and the Regional Comprehensive Economic Partnership (RCEP).

The introduction of an ETF cross-border scheme is good news for institutional investors due to the golden opportunity to gain direct exposure to China's domestic market through a financial instrument that is largely present in investors' portfolios as a result of its unique characteristics of high liquidity, high diversification, low risk and moderate management fees.

It is also important to underline that establishing a new link does not constitute the previous ETF cross-border initiative that China has agreed with foreign countries. The launch of a cross-border ETF Connect Scheme between Japan Exchange Group, Shanghai Stock Exchange, and Shenzhen Stock Exchange in 2019 and the MOU between the Shanghai Stock Exchange and the Korea Exchange for the launch of an ETF cross-border scheme announced in May 2021 are solid examples of China's long-standing commitment to creating a more accessible domestic marketfor foreign investors.

In this sense, by adding a brand-new link with Singapore, in addition to already established ETF frameworks with Hong Kong, Tokyo and Seoul, the Chinese mainland can get the missing piece of a puzzle toward the complete financial linkage among all the major 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 that the region plays as a global ETF hub.

One last aspect that I think is important to consider is the contribution that Shenzhen can offer in the cross-border ETF link since the city, a world-class tech hub with a highly skilled workforce, has already gained years of valuable experience through a Stock Connect Program with Hong Kong while also playing a pivotal role in the development of the Greater Bay Area. The fact that Singapore is not only a global financial center but also a leading tech 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-sized enterprises and, in this way, putting financial services in the best condition to support the real economy.

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

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