Editor's note: Wang Jianhui is the general manager of the research and development department at Capital Securities. The article reflects the author's opinions and not necessarily the views of CGTN.

As a relatively new investment tool even in mature capital markets, exchange traded funds (ETF) – a pooled investment security that can be bought and sold like an individual stock, and can be structured to track anything from various indices to commodity prices – have been gaining significance in the last 20 years in China.

On July 22, 2022, 141 Chinese mainland-listed ETFs and 10 Hong Kong-listed ETFs were included in the mainland-Hong Kong stock connect.

Based on the 2024 revised implementation rules of the Shanghai/Shenzhen-Hong Kong stock connect, the three stock exchanges have recently updated their lists of tradable ETFs.

Several important implications are worthy of our attention.

The recent move as another major upgrade of the "stock connect" could enhance market participation and efficiency. 

Due to their low costs and (non-systematic) risk-minimizing nature, ETFs would better serve risk-adverse and cost-sensitive long-term investors as well as short-term traders. 

Utilizing suitable ETFs, Chinese mainland investors could access the market of other side more easily and efficiently, with no need to deal with the 2,760 A-shares or 545 Hong Kong stocks individually. 

The recent ramp-up of the mainland side (northbound) not only brings in more industry-concept plays such as cloud computing, software, robot, central state-owned enterprises shareholder return, rare metals ETFs and so on, but also introduces enhanced ETFs, the ones with some active management, for the first time.

With more available ETFs, Hong Kong and foreign fund investors could have a greater chance to beat the overall market. By the end of this week, there were 974 ETFs with total capitalization of 2.65 trillion yuan ($364.31 billion) in the A-share market. 

During the last two years, 70 such passive-managed index funds outperformed with returns from 17.3 to 50.4 percent, while only nine active-managed open-end funds could reach that level. 

And the timing of stepping up ETF trades now is more advantageous.

The average price-to-earnings ratio in the segment is 20.08 compared with 28.1 two years ago (iFind data). 

If used properly and reasonably, ETFs could be profitable tools of arbitrage when the funds or the underlying stocks are not correctly priced. To do so, investors could choose to buy the related ETF or redeem the fund for underlying shares.

More importantly, the expansion of ETF supply signalizes that China will stay on course in its opening-up policy. It would roll out more necessary measures to facilitate cross-border investments and trades, and gradually integrate into the global financial markets, as promised upon joining the World Trade Organization 24 years ago. 

During this process, Hong Kong has been and will be playing the key role as both the bridge with other markets and indispensable component of the greater China market. Although the current "stock connect" only covers about half of the A-share market, the total capitalization has already accounted for 91 percent of the mainland market. With the upgraded "connect" program through ETFs, Hong Kong and foreign investors could establish or deepen their presence in the mainland market to share the ongoing growth of the Chinese economy.

And potentially, the mainland market is getting a boost as well. 

On the one end, the expectation about the liquidity in A-share market could be improved, which helps to strengthen the confidence of Chinese mainland investors. 

By the end of last week, the average daily turnover of the 782 stock ETFs was 29.6 billion yuan, higher than 16.5 billion when ETFs were included in the program, but lower than the level in January or 36.4 billion yuan. 

The turnover rate was 5.38 percent, down from 6.89 percent two years ago and 7.15 percent beginning this year (iFind data), meaning the trades become less active. 

Making 60 percent more ETFs tradable for Hong Kong and foreign investors could help to generate more trades in the future. 

With six more Hong Kong or "south-bound" ETFs added to the "menu," on the other end, the mainland demand of cross-border investment could be better satisfied. 

Since the beginning of 2024, the average turnover of the out-bound or cross-border ETFs accounted for 28.4 percent in the total ETF trades (iFind data), indicating the growing attention of Chinese mainland investors.