(Yicai Global) April 23 -- China’s securities regulator recently stopped accepting applications for new exchange-traded funds in hot emerging sectors in a bid to head off potential risks as market volatility increases.

The China Securities Regulatory Commission is turning down submissions for ETF products that invest in areas like semiconductors, fifth-generation wireless communications and new energy vehicles, Yicai Global learned from several sources at mutual funds.

Requests for “popular ETFs that invest in the Star Market and 5G sector have been restricted," a product division head at a mutual fund manager in south China told Yicai Global, adding that the excessive number of applications for similar ETFs may be the reason.

China's ETF market underwent explosive growth last year, with a 2.4-times and a 4.5-times gain in the number of products newly set up and available for subscription. China had 256 ETFs as of the end of 2019, with a total market value of just under CNY600 billion (USD85 billion).

Commodities ETFs lacking market liquidity have also been impacted by the recent halt. The regulator has rejected submissions for crude oil funds from institutional investors.

"The regulator has made liquidity a mandatory indicator for new ETFs," a staffer in the product division of a mutual fund in Beijing said. "What I’ve learned is that the combined value of the shares circulating in a sectoral index's constituent stocks must make up a certain percentage of the total value of shares traded in the whole market.

"For this reason, popular sectors such as medicine, 5G and semiconductors find it almost impossible to meet the liquidity indicator," he added. "The regulator thought risks may arise if such ETFs were approved for listing, but ETF-traded commodities like crude oil have greater difficulty meeting the liquidity requirement as there is almost none in such ETFs.”

ETF investor are investing in an index, with gains generally consistent with changes in that index as an ETF is a type of index-tracking open fund traded on an exchange. ETFs are generally entirely passive in their management.

"The market will undergo a huge shock and volatility if centralized subscription and redemption occurs in the cycle of adjustment, especially when a fund is already particularly large," another person working for a mutual fund said.

Editors: Tang Shihua, Ben Armour