Singapore’s largest ETFs to be excluded from China connect scheme

The recently announced exchange traded fund link between the Singapore Exchange and Shenzhen Stock Exchange will not feature fixed income ETFs or real estate investment trust products, potentially tempering enthusiasm for the scheme in its initial stages.

The two bourses signed a memorandum of understanding in December to develop an ETF connection allowing investors in Singapore and China to access feeder ETFs listed locally on each exchange.

The agreement comes amid surging growth in the Singapore ETF landscape, with locally listed ETF assets soaring 47 per cent to S$12.5bn ($9.3bn) last year, following 57 per cent growth in ETF assets in 2020.

Michael Syn, Singapore-based head of equities at the Singapore Exchange, said he expected the scheme to be launched within the year but in its initial stages will permit a more limited range of products.

This article was previously published by Ignites Asia, a title owned by the FT Group.

The focus at the start would be on equities ETFs due to their larger turnover versus fixed income ETFs, as well as the broader range of investors using equities ETFs, said Syn.

This decision would rule out most of Singapore’s largest locally listed ETFs from the link-up between the Chinese bourse and Singapore exchange.

Six out of the top seven Singapore ETFs by net inflows in 2021 were fixed income or real estate investment trust (Reit) products, led by BlackRock’s iShares USD Asia High Yield Bond ETF’s S$2.94bn, which accounted for almost three-quarters of net inflows into locally listed ETFs last year.

Syn noted that most fixed income ETFs were held by institutions and tended to come in very large ticket sizes, versus equities ETFs that are traded by robo-advisers, private wealth institutions and individual investors.

“Our motivation isn’t just large ETFs but frequently used ETFs,” he added.

Reit ETFs could be the logical next step in terms of inclusion in the scheme, he added, but there was a certain amount of education needed among both onshore asset managers and Chinese investors before doing so.

However, some in the industry believe that this approach might not be beneficial for ensuring that there is a strong initial uptake when it is eventually launched.

Melody He, Hong Kong-based deputy chief executive of CSOP Asset Management, said the exclusions could temper excitement among Singapore ETF issuers for the scheme in the beginning.

She said Singapore’s fixed income and Reit ETFs were likely to be the biggest draw for investors in China, but added that regulators might have wanted to keep things simple initially, especially when retail investors are involved.

Kao Shih Teng, Singapore-based senior director and head of product solutions at Lion Global Investors, said that allowing for non-equities ETFs was likely to be more of a “phase-two” development.

ETF issuers in Singapore had frequently struggled to attract sufficient retail interest to build asset size and liquidity, but if locally listed ETFs could be distributed to Chinese investors, the probability of achieving profitability increased, CSOP AM’s He said.

However, Ng Sze Yoon, Singapore-based senior director for Asia-Pacific insights at Broadridge, said companies will need to iron out operational and settlement issues before there could truly be connectivity between the two markets.

Any ability to leverage on parent group resources will be “massively helpful”, she said, though she noted that with the size of the Chinese market, even a tiny percentage of the market was huge compared with other markets in the region.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.

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