Chinese Investors Boost Saudi ETFs Amid Local Equity Challenges
Chinese investors are increasingly turning to Saudi Arabian ETFs due to poor returns from local equities, driven by the growing economic and trade relationships between the two nations.
Published July 31, 2024 - 00:07am
Chinese investors are increasingly putting money into two newly launched exchange-traded funds (ETFs) tracking Saudi stocks. This surge in interest is attributed to the poor performance of local equities and the appeal of foreign assets. According to financial reports, Saudi-focused ETFs had a robust start when they debuted on July 16 in Shanghai and Shenzhen, each soaring by the daily limit of 10 percent on their first two trading days.
Trading was temporarily halted on July 18 after managers reported that the premium of their share prices over their net asset values (NAV) had become too high. The heightened interest in these ETFs can be attributed to the strengthening economic and trade relationships between China and Saudi Arabia.
Recently, companies and sovereign funds from both sides have announced numerous billion-dollar deals in industries such as technology, solar power, and electric vehicles. Nelson Yan, co-chief investment officer at Fosun Wealth International in Hong Kong, stated that Chinese investors are eager for better returns from overseas assets due to the low yields from domestic investments.
Yan added that the investment climate between China and Saudi Arabia is favorable, with lower geopolitical risks. Furthermore, Chinese government entities are encouraging investments in the Middle East, and Chinese index companies are keen on developing Middle East-related indexes and ETFs.
The Huatai-PineBridge CSOP Saudi Arabia ETF QDII, listed in Shanghai, traded at a premium of up to 17 percent over its NAV on its second trading day. This premium later decreased to 3.8 percent by July 24. Similarly, the Shenzhen-listed China Southern Asset Management CSOP Saudi Arabia ETF QDII traded at a premium of 6 percent on the same day. Typically, most ETFs trade within 1 percent of their NAV.
At the listing event in Shenzhen, Saudi Public Investment Fund Governor Yasir Al-Rumayyan said that the ETF gives investors in Asia access to the Saudi equity market and its sustainable long-term growth driven by strategic economic transformation. This enthusiasm for Saudi shares is not unprecedented. Earlier this year, Chinese mutual fund houses attempted to curb investor enthusiasm for funds focused on US stocks by imposing purchase restrictions.
Additionally, some fund companies allocated more Qualified Domestic Institutional Investor quotas to Japanese ETFs to better align their share prices with their NAVs. The two Saudi ETFs track the FTSE Saudi Arabia Index, which includes significant weightings in financials, basic materials, and energy companies. Notably, Al Rajhi Bank, Saudi Aramco, and Saudi National Bank constitute nearly one-third of the index.
Economic ties between Saudi Arabia and China have been strengthening in recent years. In November, the Kingdom's central bank, also known as SAMA, and the People's Bank of China signed a local currency swap agreement worth $6.93 billion. The agreement will last three years, with the possibility of extension after two years by mutual agreement.
Chinese investors' interest in Saudi stocks reflects broader trends of seeking diversification and better returns from overseas assets. The favorable investment climate and reduced geopolitical risks make Saudi Arabia an attractive option. The launch of these ETFs marks a new chapter of financial connectivity between China and Saudi Arabia, promising sustainable long-term growth.