May 27thThe China Securities Regulatory Commission and the Hong Kong Securities Regulatory Commission have agreed in principle that qualified exchange-traded funds (exchange-traded funds) (unified referred to as ETF) will be included in interconnection, and after ETF is included in interconnection, mainland and Hong Kong investors can buy and sell shares and ETF funds listed on each other's exchanges through local securities companies or brokers.Based on the principles of fund size, tracking index stock selection and interconnection of underlying stocks, the two places will determine qualified mainland ETF and Hong Kong ETF to be included in the target scope.

It is reported that on December 24 last year, the exchanges of Shanghai, Shenzhen and Hong Kong reached a consensus on the overall plan for the inclusion of ETF in the target of interconnection, so as to further expand and improve the interconnection mechanism between the capital markets of Hong Kong and the mainland.

ETF has become an eligible security for Interconnection, marking a new milestone in market interconnection between China and Hong Kong. Hong Kong's role as a "super contact" between China and international markets will be further strengthened, helping to promote capital flows between East and West.

It is worth mentioning that ETF is a low-cost diversification tool favored by many investors.The inclusion of ETF into the target of interconnection will further expand the investor base of the two markets and help to promote the healthy development of the ETF market of the two places.

Europe Guansheng, chief executive of HKEx, said, "the inclusion of ETF is a landmark achievement of the upgrading of the interconnection mechanism. The inclusion of ETF into the target of interconnection can meet the higher requirements of all parties in the market for interconnection, create a win-win situation for the mainland and Hong Kong markets, and promote the sustainable development of the two markets. "

A reporter from the Securities Times learned that the implementation of the arrangements for the inclusion of ETF in the Shanghai and Shenzhen Stock Connect requires regulatory approval from the two places, and the detailed arrangements are still being confirmed. Eligible ETF listed on Shanghai Stock Exchange and ETF listed on Shenzhen Stock Exchange will become eligible securities of Shanghai Stock Connect and Shenzhen Stock Connect. The official launch date will be announced separately.

So the question is, what kind of ETF is eligible securities? It will also be divided into northbound ETF and southbound ETF.

It is reported that northbound ETF eligible for interconnection needs to meet the following conditions:

1. The relevant ETF must be denominated in RMB, and the average daily assets in the last six months should not be less than RMB 1.5 billion.

2. The relevant ETF has been on the market for not less than six months

3. The tracking target index has been released for one year.

4. Among the underlying indices tracked, the weight ratio of stocks listed on the Shanghai and Shenzhen stock exchanges is not less than 90%, and that of Shanghai Stock Connect and Shenzhen Stock Exchange is not less than 80%.

5. The target index or compilation plan to be tracked shall meet any set of conditions, that is, the weight of single component shares shall not exceed 30%, the number of constituent shares shall not be less than 30, the weight of single component securities shall not exceed 15%, and the total weight of the top five securities shall not exceed 60%, and the average daily turnover of the constituent stocks with a total weight ratio of more than 90% in the last year shall be in the top 80% of the stocks listed on the local stock exchange.

The inclusion of northbound ETF into the Shanghai Stock Connect and Shenzhen Stock Connect means that all Hong Kong and overseas investors, including institutional and individual investors, can be bought and sold. However, there is a daily quota limit for ETF trading under the Shanghai-Hong Kong Stock Connect and Shenzhen Stock Connect, and the eligible A-shares and ETF of Shanghai Stock Connect and Shenzhen Stock Connect will share the same daily northbound trading quota.

That is, the Shanghai-Hong Kong Stock Connect, that is, the Shenzhen-Hong Kong Stock Connect, each has a daily quota of 52 billion yuan for the north and 42 billion yuan for the south.

SimilarlyEligible northbound ETF will become a sell-only security and be suspended from buying once any of the following conditions are triggered in subsequent periodic adjustments:

1. The average daily assets of the relevant ETF in the last six months are less than RMB 1 billion.

2. Among the underlying indices tracked, the weight ratio of stocks listed on the Shanghai and Shenzhen exchanges is less than 85%, or the weight ratio of Shanghai Stock Connect shares to Shenzhen Stock Exchange shares is less than 70%.

3. The tracking target index and its compilation plan trigger any of these conditions, such as the single component equity weight is more than 30%, the number of constituent shares is less than 30, the single component weight is more than 15%, or the combined weight of the top five securities is more than 60%.

Eligible southbound ETF and northbound ETF need to meet the same conditions, but denominated in Hong Kong dollars and mainly track the Hang Seng series index.

According to reporters, the Hong Kong ETF market is developing rapidly, with the average daily turnover growing at an annual rate of 20% in 2021. As Asia's leading ETF hub, Hong Kong is the preferred ETF investment center for Asian investors, especially Singapore, South Korea and Taiwan.