China and Japan are set to list each other’s index funds as soon as May, the Nikkei Asian Review reports.
In a first for the country, China will trade exchange-traded fund (ETF) tracking with the Japanese Nikkei Stock Average and Topix on the Shanghai Stock Exchange (SSE). Conversely, Japan’s Tokyo Stock Exchange (TSE) will host ETF tracking on the SSE.
The International ETF Deal
The deal is as much a show of Chinese-Japanese solidarity as it is a financial arrangement. With geopolitical tensions cooling amid the US-China trade talks, the move comes as a gesture of accord in the region. It also serves to extricate Japan from being in the middle of a dispute between superpowers.
One day after the news broke, though, Japan pressed the Asian Development Bank (ADB) to stop issuing development loans to China. Japan and the U.S. are the ADB’s top two contributors, the Nikkei Asian Review reported.
Japan already hosts blue chip Chinese stocks and a small selection of Chinese concept stocks on the TSE. But the agreement gives Japanese investors MORE exposure to the broader SSE.
The cross-listing may result in more money flowing to Japan from China than vice-versa, however.
China saves money at shockingly high rates (46.4 percent in December 2018), while the U.S.’ gross savings rate is comparatively low at 17.3 percent. That means Chinese people and businesses save money at more than twice the rate of their American counterparts. It also means Chinese money is going toward investments.
By comparison, Japan—notorious for its consumer habits to save rather than spend—boasts a gross savings rate of ‘only’ 26.2 percent. With Chinese investors’ interest to invest abroad, the TSE might experience a bigger boost from the ETF deal than the SSE.
Chinese Markets Mature
Chinese regulators discourage capital outflows, which have increased as many Chinese investors have chosen to invest outside of the country. Through the tumult of 2018’s US-China trade war, for example, the People’s Bank of China reportedly implemented controls to protect the yuan from short sellers and avert chronic outflows.
Stock Connect, a system introduced by Chinese Premier Li Keqiang in 2014, allows Hong Kong and Mainland Chinese investors to trade on each other’s exchanges. Li intended for his initiative to stabilize his countries markets with international investments.
Premier Li’s Stock Connect program only launched on a limited basis five years ago. Its early expansion was halted due to a financial downturn and a $24 billion annual loss to scam artists.
Capital outflows rose throughout 2018 in China due to economic angst amid the U.S.-China trade war. In 2019, however, inflows have risen against analyst expectations, marking a turning point for Chinese stock markets in growth.
The Japan-China ETF cross-listing will reportedly come as soon as May.