In recent years, the connectivity between the capital markets of Mainland China and Hong Kong has continued to deepen, providing investors in both regions with increasingly diverse cross-border investment tools. As an important vehicle within this connectivity framework, the ETF market has attracted significant attention in recent years with the listing of multiple products investing in emerging markets (such as Saudi Arabia and Southeast Asia). These products not only reflect growing market demand for diversified asset allocation but also highlight how product innovations, such as the ETF Cross-listing Mechanism and ETF Connect Mechanism, have driven the opening up of the capital markets.
This article aims to review and compare these two mechanisms and discuss their their respective structures, risk profiles and future development trends.
I. The ETF Cross-listing Mechanism
What is ETF Cross-listing Mechanism?
There is currently no official Mainland China law or policy to govern the ETF Cross-listing Mechanism. The latest guidance in Hong Kong the Circular on streamlined requirements for eligible exchange-traded funds adopting a master-feeder structure issued by the Hong Kong Securities and Futures Commission (“SFC”) on 16 May 2024 (the “2024 Circular”). The ETF Cross-listing Mechanism allows fund managers in Mainland China and Hong Kong to launch an ETF feeder (a “feeder fund”) in their respective markets. The feeder fund invests the majority (typically 90% or more) of its assets in a master ETF (the “master fund”) listed in the other market. The master ETF, in turn, invests in its home market or other targeted markets, thereby achieving the effect of gaining indirect cross-border market connectivity.
The mechanism was officially launched on 28 August 2020, when the SFC approved two ETFs for listing on the Hong Kong Stock Exchange (“HKEX”)1, and the China Securities Regulatory Commission (“CSRC”) simultaneously approved two ETFs for listing on the Shenzhen Stock Exchange (“SZSE”). On 1 June 2021, the Shanghai Stock Exchange (“SSE”) and HKEX introduced another pair of cross-listed ETFs.
How does ETF Cross-listing Mechanism Work?
Under this mechanism:
- Mainland China-listed feeder ETFs mainly use the QDII channel to allocate over 90% of their assets to Hong Kong-listed “master” ETFs;
- Hong Kong-listed feeder ETFs primarily use the QFII channel to allocate over 90% of their assets to Mainland-listed “master” ETFs.
For example, a recently launched Huatai-PineBridge – CSOP Saudi Arabia ETF invests most of its assets via the QDII channel in the CSOP Saudi Arabia ETF listed on HKEX. In a reciprocal arrangement, CSOP introduced in Hong Kong an ETF primarily investing in the Huatai-PineBridge CSI 300 ETF.
The SFC sets out requirements for master and feeder ETFs in the 2024 Circular. At a high level:
- the master ETF must provide investor protection comparable to a fund authorised by the SFC, have a good compliance record, and maintain sizeable assets under management
- the feeder ETF must be a Hong Kong-domiciled ETF authorised by the SFC, complying with applicable Hong Kong regulations. The management company (which must be licensed or registered for Type 9 regulated activity with a good compliance record) should report to the SFC as soon as practicable if the master ETF ceases to comply with the relevant requirements, and have in place appropriate arrangements to inform Hong Kong investors of material changes to the master ETF.
The 2024 Circular removes specific requirements on fund size and track record for the master ETF that were in place in the previous version of the same circular, as well as permits active ETFs to be used as master ETFs on a case-by-case basis. Notably, under the SFC’s streamlined route, the Mainland-listed master ETF does not need to be authorised by the SFC, enhancing the cost-effectiveness of the arrangement.
Why choose the ETF Cross-listing Mechanism?
For investors, the ETF Cross-listing Mechanism Offers a convenient and efficient cross-border investment tool, particularly for accessing emerging or otherwise hard-to-reach markets such as Saudi Arabia. For fund managers, it simplifies cross-border operations through the use of QDII/QFII channels, while mitigating tracking errors caused by time zone, currency, or market structure differences. For the market, it enhances liquidity and product diversity, marking an important step in advancing two-way capital market openness.
II. The ETF Connect Mechanism
What is ETF Connect?
The ETF Connect Mechanism integrates eligible ETFs listed on Mainland and Hong Kong exchanges into the existing Stock Connect framework, allowing investors to directly trade ETFs listed on the other market through their local brokers—thus creating a two-way direct investment channel.
The concept of including ETFs under Stock Connect was first agreed upon by the CSRC and the SFC in August 2016. After six years of coordination, on 27 May 2022, the two regulators jointly announced their approval in principle2 . The program officially launched on 4 July 2022, initially covering 87 ETFs (83 A-share ETFs and 4 Hong Kong ETFs).
Subsequently, in April 2024, the CSRC announced an expansion of eligible ETF products under Stock Connect3 . The SSE, SZSE, and HKEX accordingly relaxed criteria such as size and weighting requirements. The number of eligible ETFs increased to 241 on 22 July 2024, and further to 265 on 20 January 2025.
How does ETF Connect Work?
According to the SSE Measures for Implementing Shanghai–Hong Kong Stock Connect (2024 Revision) and the SZSE Measures for Implementing Shenzhen–Hong Kong Stock Connect (2024 Revision), ETFs may be included in or removed from the program based on the criteria provided by such measures. A summary of the key criteria is provided below for reference.
SSE/SZSE ETFs (Northbound)
Inclusion Criteria
An ETF listed on the SSE or SZSE that meets all of the following conditions on the ETF periodic review date4 will be included as an eligible ETF under the Stock Connect program:
(i) It is denominated in RMB, and its average daily AUM over the past six months is not less than RMB 500 million;
(ii) It has been listed for at least six months;
(iii) The underlying index it tracks has been published for at least one year;
(iv) Among the constituent securities of the tracked index, the combined weight of stocks listed on the SSE and SZSE is not less than 60%, and the combined weight of stocks eligible for Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect is not less than 60%;
(v) The underlying index or its methodology meets the following requirements:
a. For broad-based stock indices, the weight of any single constituent stock must not exceed 30%;
b. For non-broad-based stock indices, all of the following conditions must be met:
(a) the index must include no fewer than 30 constituent stocks;
(b) the weight of any single constituent stock must not exceed 15%, and the aggregate weight of the top five constituents must not exceed 60%;
(c) constituent stocks representing at least 90% of the index’s total weight must have ranked within the top 80% of all listed stocks on their respective exchanges by average daily turnover over the past year; and
(vi) Any other conditions as determined by the SSE or SZSE.
Removal Criteria
An ETF under the Shanghai-Hong Kong or Shenzhen-Hong Kong Stock Connect program will be removed from the Stock Connect ETF list if, on the ETF periodic review date, it falls under any of the following circumstances:
- Its average AUM over the past six months is less than RMB 400 million;
- Among the constituent securities of its tracked index, the combined weight of stocks listed on the SSE and SZSE is less than 55%, or the combined weight of stocks eligible for Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect is less than 55%;
- It no longer satisfies the conditions set out in item (5) under the “Inclusion Criteria”; or
- Any other circumstances as determined by the SSE or SZSE
HKEX ETFs (Southbound)
Inclusion criteria
An ETF listed on the HKSE that meets all of the following conditions on the ETF periodic review date5 will be included as an eligible ETF under the Stock Connect program:
(i) It is primarily regulated by the SFC;
(ii) It is denominated in Hong Kong dollars, and its average daily AUM over the past six months is not less than HKD 550 million;
(iii) It has been listed for at least six months;
(iv) The underlying index it tracks has been published for at least one year;
(v) Among the constituent securities of the tracked index, the combined weight of HKSE-listed stocks is not less than 60%, and the combined weight of stocks eligible for Southbound Stock Connect is not less than 60%;
(vi) The underlying index or its methodology meets the following requirements:
a. For broad-based stock indices, the weight of any single constituent stock must not exceed 30%;
b. For non-broad-based stock indices, all of the following conditions must be satisfied:
(a) the index must include no fewer than 30 constituent stocks;
(b) the weight of any single constituent stock must not exceed 15%, and the aggregate weight of the top five constituents must not exceed 60%;
(c) constituent stocks representing at least 90% of the index’s total weight must have ranked within the top 80% of all listed stocks on their respective exchanges by average daily turnover over the past year;
(vii) It is not a synthetic ETF, leveraged product, or inverse product; and
(viii) Any other conditions as determined by the SSE or SZSE.
Removal Criteria
An ETF under the Southbound Stock Connect program will be removed from the Stock Connect ETF list if, on the ETF periodic review date, it meets any of the following conditions:
- Its average daily AUM over the past six months is less than HKD 450 million;
- Among the constituent securities of its tracked index, the combined weight of SEHK-listed stocks is less than 55%, or the combined weight of Southbound Stock Connect eligible stocks is less than 55%;
- It no longer satisfies the conditions set out in items (vi) and (vii) under the “Inclusion Criteria”; or
- Any other circumstances as determined by the SSE/SZSE.
Why choose the ETF Connect Mechanism?
For investors, the ETF Connect provides a direct trading channel through existing Stock Connect accounts, without the need to open new investment accounts. For the market, it significantly expands two-way investment flows—northbound trading offers global investors broader access to A-share ETFs, while southbound trading facilitates Mainland investors’ exposure to Hong Kong and overseas markets. For ETF products, it improves liquidity, market visibility, and competitiveness of ETFs included in the program, fostering the parallel development of both markets.
III. Comparison Between the Two Mechanisms
Although both mechanisms aim to promote closer integration between the Mainland and Hong Kong markets, they differ in several key aspects, including their operating models, product structures, and market scope.
Operating Model
ETF Cross-listing Mechanism
“Fund-to-Fund” model: new ETFs are created to invest directly in a specific ETF listed in the other market.
ETF Connect Mechanism
“Direct Channel” model: existing eligible ETFs are included in the Stock Connect program for direct cross-border trading.
Product Structure
ETF Cross-listing Mechanism
Creates new ETFs focusing on a specific offshore underlying.
ETF Connect Mechanism
Expands the investor base of existing ETFs without creating new products.
Market Scope
ETF Cross-listing Mechanism
Can flexibly extend to third markets (e.g., Hong Kong ETFs investing in Saudi Arabia or Japan).
ETF Connect Mechanism
Primarily facilitates bilateral capital flows between the Mainland and Hong Kong.
Investor Experience
ETF Cross-listing Mechanism
Investors trade as if buying domestic ETFs and gain indirect exposure to offshore assets,
ETF Connect Mechanism
Investors directly trade ETFs listed in the other market via Stock Connect.
Strategic Role
ETF Cross-listing Mechanism
Focuses on product-level innovation and introducing new asset classes.
ETF Connect Mechanism
Focuses on infrastructure-level integration and enhancing two-way connectivity.
In essence, the two mechanisms are complementary rather than substitutive. The cross-listing mechanism emphasises innovation and product diversity, while ETF Connect emphasizes accessibility and market integration. Together, they form a multi-dimensional framework supporting China’s capital market liberalisation.
IV. Conclusion and Outlook
The integration between Mainland China and Hong Kong’s capital markets continues to evolve through regulatory innovation and market practice. The ETF Cross-listing and ETF Connect mechanisms advance two-way market openness from different dimensions: one from the perspective of product innovation, and the other from market infrastructure development.
Looking ahead, as China’s capital markets continue to open up, more assets from additional jurisdictions are expected to enter the Mainland market through cross-listing arrangements, while the scope of eligible ETFs under ETF Connect will likely keep expanding.
We at Simmons & Simmons and YaoWang are here to help you realise the opportunities that arise from the further expansion and opening up of the cross-border capital markets between Mainland China and Hong Kong. Our fully bilingual team of partners and lawyers has in-depth experience advising various fund managers on launch of ETFs in both markets, as well as on ETF Connect and ETF cross-listing matters.
Should you have any questions or require further assistance regarding any of the above, please do not hesitate to contact us.
Melody Yang
Co-head / Partner
Shanghai YaoWang Law Offices
T +86 21 8013 5022
E melody.yang@yaowanglaw.com
Sherry Si
Partner
Shanghai YaoWang Law Offices
T +86 21 8013 5158
E sherry.si@yaowanglaw.com
1 https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=20PR80
2 https://www.csrc.gov.cn/csrc/c100028/c3046901/content.shtml
3 https://www.csrc.gov.cn/csrc/c100028/c7474875/content.shtml
4 For Shenzhen Stock Connect ETFs, this refers to the effective date of the periodic adjustment of the SZSE Component Index; for Shanghai Stock Connect ETFs, this refers to the effective date of the semi-annual adjustment of the SSE 180 Index.
5 For Southbound Stock Connect ETFs, this refers to the last Hong Kong trading day of the month in which the semi-annual adjustment of the Hang Seng Index becomes effective.
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