HONG KONG – China and Saudi Arabia’s stock exchanges are currently in active dialogue concerning the possibility of cross-listing exchange-traded funds (ETFs) on each other’s bourses, according to information obtained from three sources familiar with the matter. This move, if successful, is expected to be a crucial step in deepening financial ties between the two countries and building upon their increasingly warming diplomatic relations.
Although the talks are in their infancy, there’s a shared sense of optimism on both sides. The stakes are high and the benefits potentially lucrative, given that this venture could represent a major first step by Beijing and Riyadh towards extending their collaborative efforts beyond the existing spheres of energy, security, and sensitive technology sectors.
Negotiations are ongoing between the Shenzhen Stock Exchange, one of the two key bourses in mainland China, and the Saudi Tadawul Group, operator of the Saudi Stock Exchange. The sources provided insight into a programme, called ETF Connect, which is under consideration by both parties. This initiative, if actualized, would see China expanding its ETF Connect reach beyond East Asia for the first time, thereby signalling a commitment to opening up its financial markets, worth trillions of dollars, to global investors.
Several of China’s leading ETF operators have reportedly been informed over the recent months about the prospective cross-listing agreement with Saudi Arabia. A source also mentioned that several of these firms are contemplating the proposition.
When contacted by Reuters, neither the China Securities Regulatory Commission, the Shenzhen Stock Exchange, nor the Tadawul Group offered comments. Furthermore, the sources involved chose to remain anonymous due to not being authorized to speak publicly about the matter.
By enabling the cross-listing of ETFs, investors based in China and Saudi Arabia would be able to trade funds that track specific stock or bond indexes listed on each other’s exchanges. This would represent a significant step forward in facilitating direct access to their respective financial markets for investors from both countries.
China has, in recent years, initiated ETF Connect projects with offshore stock exchanges in Hong Kong, Japan, South Korea, and Singapore. While trading volumes for these programs are yet to surge significantly, certain products have garnered popularity among investors. One notable example is the ICBC CSOP FTSE Chinese Government Bond Index ETF, launched by China’s CSOP Asset Management in 2020 under the ETF Connect scheme with Singapore, which now ranks as one of the largest ETFs domiciled in the city-state.
As of the end of June this year, there were a total of 886 ETFs listed on the Chinese and Hong Kong bourses, boasting a combined value of $256.8 billion, according to data provided by Morningstar. Despite having a nascent ETF market with just eight products listed, Saudi Arabia’s stock exchange remains a significant player in the emerging markets, with a capitalization of $2.7 trillion.
The Hong Kong Exchanges and Clearing Ltd (HKEX) are also reportedly in separate discussions with its Saudi counterpart to explore a similar cross-listing programme. Earlier this year, HKEX signed an agreement with the Tadawul Group to consider cooperation across several areas, including cross-listings, to mutually benefit the financial markets of both entities. HKEX pledged to update the market on any significant developments in their cooperation.
Jackie Choy, director of passive investment ratings for Morningstar Asia, opined that the Saudi ETFs would offer “a very niche and small offering” for China and Hong Kong investors. Choy cited potential exposure in Arabic equity, bonds, gold, and U.S. equity, stressing that local investors’ understanding of the market would be crucial before making any investments under the proposed scheme.
China’s diplomatic efforts have been notably robust as it seeks to establish and strengthen ties with countries in Europe, the Middle East, and Africa. These efforts are widely seen as a strategic response to what Beijing perceives as Washington’s weaponisation of economic policies. This dynamic is evident in China’s push to court Saudi Arabia, a key U.S. ally.
The economic cooperation between Beijing and Riyadh has traditionally been anchored on energy interests. However, there has been a notable expansion of ties in trade, investment, and security. As of 2021, China is Saudi Arabia’s top trading partner, with trade worth $87.3 billion.
Signs of this deepening partnership are evident in various sectors. Saudi Arabia’s Ministry of Investment inked a $5.6 billion deal with Chinese electric car manufacturer Human Horizons in June, initiating collaboration on the development, manufacture, and sale of vehicles. Moreover, in March, Saudi oil giant Saudi Aramco expanded its multi-billion dollar investment in China by finalising and upgrading a planned joint venture in northeast China and acquiring a larger stake in a privately controlled petrochemical group.
The financial and strategic implications of these ongoing negotiations and partnerships highlight the broader geopolitical and economic shifts occurring at the global stage. While this report represents the most recent development, it’s evident that the rapidly evolving relationship between China and Saudi Arabia may present a host of opportunities, challenges, and uncertainties for global stakeholders in the years to come.
Xie Yu and Selena Li reported from Hong Kong, with additional reporting by Hadeel Al Sayegh in Dubai. The report was edited by Sumeet Chatterjee and Muralikumar Anantharaman.
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