Regulators have formally clarified the rules governing insurance capital investment in Hong Kong Stock Connect ETFs.
Multiple insurers recently received a letter specifying that institutions already permitted to invest in Hong Kong Stock Connect equities may also invest in Hong Kong Stock Connect ETFs, following the same regulatory framework that applies to Stock Connect stock investment, according to industry sources. The new rules took effect on 20 September.
The move is not a sudden opening but rather the substantive implementation of a policy statement made by the financial regulator on 18 August, which expressed support for mainland insurance funds participating in the connectivity between mainland and Hong Kong financial markets and for mainland insurers investing in Hong Kong Exchange-traded funds through the Shanghai-Hong Kong-Shenzhen Stock Connect. The roughly one-month gap between the statement and the formal rules reflects a fairly compressed timeline.
Zhu Junsheng, a postdoctoral fellow and professor of applied economics at Peking University, said in an interview that insurance capital continues to grow in scale while yields on traditional fixed-income assets come under pressure, creating a need for more diversified equity investment tools. Compared with directly investing in individual Hong Kong stocks, ETFs offer diversification, standardisation and higher transparency, making them more suitable for institutional investors. The policy therefore does not simply add one more investment category but rather pushes cross-border equity investment by insurers from single-stock allocation towards portfolio allocation.
Complementing QDII rather than replacing it
The most direct impact of the policy is that it eases the long-standing QDII quota bottleneck that has constrained overseas allocation by insurance funds. Several industry participants noted that Hong Kong Stock Connect ETFs do not consume QDII quotas, and that allocation authority is directly linked to existing Stock Connect eligibility without requiring additional approval. This means insurers with the capability to invest in Hong Kong Stock Connect equities can enter directly, while those without can entrust eligible investment managers to operate on their behalf.
From an industry perspective, insurers have already built a certain foundation in Stock Connect participation. Of the 162 institutions that reported overseas investment activities last year, 127 had conducted Stock Connect business, accounting for about 78%. At the insurance asset management level, 30 institutions, or roughly 79%, conducted investment through entrusted accounts or by issuing insurance asset management products. This provides a ready institutional and operational base for Hong Kong Stock Connect ETFs.
However, the relationship between Hong Kong Stock Connect ETFs and QDII is not one of simple substitution. Tian Lihui, a professor of finance at Nankai University, said the two differ fundamentally in investment scope: QDII can allocate more broadly to other overseas markets, while southbound ETF connectivity still carries the constraint that Hong Kong Stock Connect stocks must account for no less than 60% of the tracked index. In terms of investment method, QDII invests overseas through domestic fund companies, whereas Hong Kong Stock Connect ETFs trade directly in the secondary market via the mutual connectivity mechanism. The two will coexist as parallel tracks with different emphases over the long term rather than merging into one.
The loosening of QDII quota management depends on the overall pace of capital account opening and is unlikely to be significantly relaxed in the short term simply because Hong Kong Stock Connect ETFs have been opened up, Tian said. But the trend is clear: the launch of Hong Kong Stock Connect ETFs does provide insurers with an alternative channel free from quota constraints, which will marginally reduce their reliance on QDII quotas and push QDII management to shift from scarce rationing towards efficiency-based allocation.
Zhu also argued that while Hong Kong Stock Connect ETFs do not consume QDII quotas, their investment scope and trading rules are bound by the Stock Connect framework, so they are not an unrestricted overseas investment channel. The two are more likely to coexist in a differentiated manner: Stock Connect mainly serves standardised allocation through the Hong Kong market, while QDII handles broader global asset allocation. The key question is not which replaces which, but how the different channels complement each other.
A research note from Soochow Securities also pointed out that Hong Kong Stock Connect ETFs include cross-border investment products and may become a new breakthrough for mainland insurers seeking overseas investment. The note cautioned, however, that overseas high-yield fixed-income assets better match current allocation needs, and overseas equity assets are not yet sufficient to become the primary allocation direction in the short term.
The appeal of Hong Kong Stock Connect ETFs to insurers also lies on the return side. Hong Kong valuations generally trade at a discount, offering a margin of safety and valuation advantages. In addition, Hong Kong Stock Connect ETFs are temporarily exempt from stamp duty, reducing transaction costs. These factors together constitute the practical impetus for insurers to allocate to Hong Kong Stock Connect ETFs.
Hong Kong market welcomes southbound long-term capital
For the Hong Kong market, the significance of insurance capital entering is not just about increasing trading volume but more importantly about improving the investor structure and shifting some capital from trading-oriented to allocation-oriented.
In Zhu's view, if insurers gradually develop long-term allocation habits, this will help strengthen the institutional and long-term capital character of Hong Kong's ETF market. Given the currently limited number of products and the profit volatility constraints arising from FVTPL accounting, however, large-scale concentrated inflows are unlikely in the short term. The greater significance lies in opening an institutional channel for long-term incremental capital into the Hong Kong market.
Wind data shows that as of 27 September, 31 ETFs were included in the Hong Kong Stock Connect scope, with combined assets of 321.9 billion yuan, all of them equity funds. From a short-term perspective, this supply is sufficient to support pilot allocation needs, but from a medium-term perspective there is a clear structural gap on the supply side, Tian said. For insurers, overseas high-yield fixed-income assets better match current allocation needs, and overseas equity assets are not yet sufficient to become a primary allocation direction in the short term.
He further noted that insurers are primarily fixed-income allocators with rigid demand for bond assets. If bond ETFs were included in the southbound connectivity investment scope, this would provide insurers with a new tool for overseas fixed-income allocation, complementing the existing southbound Bond Connect. In addition, current rules require that Hong Kong Stock Connect stocks account for no less than 60% of the tracked index, and appropriately raising the overseas stock proportion would better suit insurers' diversified allocation needs.
The pace of supply-side expansion will directly determine how quickly insurers move from pilot allocation to regular allocation. Zhu also believes that while the current supply is basically sufficient as a first step in policy launch, it is still not rich enough from the perspective of long-term allocation needs. Insurers need not only broad-based and sector ETFs but also dividend, low-volatility, quality-factor and more diverse global asset allocation products. If insurance demand is gradually released in the future, it will in turn drive the expansion of ETF product supply. The 31 ETFs are therefore more of a starting point than an end point.
Actual allocation pace may nonetheless be cautious. Hong Kong Stock Connect ETFs are typically classified under FVTPL in insurers' accounting entries, meaning fair value fluctuations flow directly into current profit and loss. Zhu told our reporter that this has implications for profit and solvency volatility management. Assets can be held for the long term, but accounting profits may fluctuate in the short term, which could affect some insurers' willingness to allocate and their investment pace.
What the policy addresses is whether insurers can invest, while FVTPL affects whether they are willing to invest more and how, Zhu said. But it does not mean insurers cannot hold for the long term; assets with genuine long-term allocation value can still be held for extended periods.
Tian noted that FVTPL means fair value fluctuations go directly into the current income statement, which constitutes a substantive constraint on insurers' allocation behaviour. Under the new accounting standards, insurance funds investing in funds can only be classified under FVTPL, and the previous strategy of categorising equity funds as available-for-sale financial assets to collect dividends and sell opportunistically no longer applies. But Tian also stressed that the impact should not be overstated: insurance capital has relatively rigid cost characteristics, and asset-liability matching requirements determine that its allocation behaviour prioritises duration matching and stable returns rather than short-term profit smoothing. The actual pace of increased allocation may be cautious, mainly through pilot allocation and phased position building, rather than simple rapid large-scale one-way inflows. In terms of holding periods, insurers' patient capital attributes will not change because of accounting categories, and the relative appeal of high-dividend Hong Kong assets continues to rise in a rate-cutting cycle, with allocation intensity expected to trend higher.
Allocation logic amid asset scarcity
The deeper backdrop to this policy adjustment is the asset scarcity pressure facing insurers in a low-interest-rate environment. Tian told our reporter that the regulator's decision to open the channel now is mainly aimed at easing the growing asset scarcity pressure on insurers. With interest rate centres continuing to decline and insufficient supply of suitable domestic assets, insurance capital balances have surpassed 40 trillion yuan, and the massive volume of new and maturing reinvestment funds lacks long-duration, stable-yield instruments to absorb them. Hong Kong Stock Connect ETFs enable one-click allocation through index tools, combining convenience with diversification and effectively improving allocation efficiency.
At the same time, the Stock Connect channel does not consume scarce QDII quotas, breaking through the quota bottleneck that has long constrained insurers' overseas allocation at the institutional level and opening a new channel for regular allocation to overseas assets, Tian said. This arrangement echoes the launch of southbound Bond Connect in June this year, together forming an institutional closed loop for cross-border allocation by insurers. The accelerated pace shows that policymakers have reached an urgent consensus on the pressure facing insurance capital allocation.
Data from the financial regulator also shows that by the end of the second quarter of 2026, insurance capital balances had surpassed 40 trillion yuan, with combined investment in stocks and securities investment funds reaching 6.39 trillion yuan. Capital of this magnitude needs more diversified allocation outlets when the supply of suitable domestic assets is insufficient. The opening of Hong Kong Stock Connect ETFs is an institutional supplement advanced under this logic.
From a longer timeline, insurers have participated in Hong Kong Stock Connect investment for a decade. In 2016, regulators allowed insurance funds to participate in Hong Kong stock investment under the Shanghai-Hong Kong Stock Connect. In 2017, Shenzhen-Hong Kong Stock Connect was included in the insurance investment scope. In 2022, ETFs were formally included in the mutual connectivity mechanism between the mainland and Hong Kong, but insurers were not yet permitted to directly invest in Hong Kong Stock Connect ETFs. The latest clarification fills this gap. In June this year, insurance participation in southbound Bond Connect trading was formally launched, and with the opening of Hong Kong Stock Connect ETFs, the toolkit for cross-border allocation by insurers is gradually being enriched.