【China Asset Select】05 Northbound Trading Guide: Using Hong Kong ETFs for Cross-Market Arbitrage

Over the past two years, Chinese assets have been like a roller coaster—plunging all the way down, but in doing so, catching the eyes of global investors once again.

• Valuation recovery story: A-shares went through a prolonged compression, and today their overall P/E ratios have dropped to historical lows, like “quality goods on sale.”

• The Hong Kong label: The Hang Seng Index and Hang Seng Tech Index still carry the title of “the world’s cheapest market,” cheap enough to make investors take a second look.

• Smart money in motion: Southbound capital continues to pour in, with ETFs like Hang Seng China Enterprises (HSCEI) and Hang Seng Tech repeatedly hitting record turnover. Beneath the noise lies opportunity.

• Policy momentum: From growth stabilization to capital market reforms, policy has acted as an “invisible hand,” steadily injecting fresh liquidity into the market.

The result? Chinese assets may be entering a cycle of “undervalued re-rating.” More overseas investors are already getting on board—quietly using Northbound Trading + Hong Kong ETFs to participate in both arbitrage and long-term allocation.

I. What is Northbound Trading? Why can it be used for HK arbitrage?

Northbound Trading is the primary channel for overseas investors to access China’s A-shares. By opening an account with an eligible broker (e.g., Tiger Brokers), Hong Kong and overseas investors can directly trade A-shares included in the “eligible list.”

Key points:

• Eligible securities: Large-cap indices such as SSE 180, CSI 300, SZSE 100, plus certain ETFs.

• Trading currency: Orders are placed in HKD; brokers automatically convert to RMB for settlement.

• Capital threshold: None. Overseas investors can freely participate.

Why does arbitrage work between A-shares and Hong Kong stocks? Because many indices or ETFs exist in both markets. When prices diverge, arbitrage opportunities arise.

Example: The Hang Seng China Enterprises Index has both a Northbound ETF version and a Hong Kong-listed ETF (02828.HK). Whenever prices slip out of sync, savvy investors can buy low and sell high across markets.

II. Popular Choices: Southern A50 vs. HSCEI—Which is Better for Arbitrage?

In the Hong Kong ETF market, a few “star products” are commonly used for cross-market arbitrage:

1. Southern A50 ( $南方A50(02822)$)

• Index tracked: FTSE China A50 Index, the 50 largest and most liquid A-shares.

• Features:

  • Concentrated in leading financials, real estate, and energy companies; highly stable.

  • Closely linked with A50 futures and ETFs, making hedging easier.

• Pros & Cons:

  • Pros: Stable performance, tight linkage with A-shares; suitable for large, conservative arbitrage trades.

  • Cons: Low volatility, meaning smaller arbitrage spreads.

2. Hang Seng China Enterprises ETF ( $恒生中国企业(02828)$ )

• Index tracked: HSCEI (H-share index), including major SOEs in banking, insurance, telecom, and energy.

• Features:

  • One of the most actively traded ETFs in Hong Kong; excellent liquidity.

  • Highly sensitive to policy shifts and investor sentiment.

• Pros & Cons:

  • Pros: High liquidity, frequent arbitrage opportunities.

  • Cons: Higher volatility; spreads may close quickly, requiring fast execution.

Simple Arbitrage Case:

• A-share HSCEI ETF quote: 15.20 RMB

• HK HSCEI ETF ( $恒生中国企业(02828)$ ), converted into RMB: 14.90 RMB

Arbitrage logic:

1. Buy HSCEI ETF in Hong Kong at 14.90.

2. Sell the corresponding A-share ETF at 15.20.

3. Spread = 0.30 RMB per unit.

For 100,000 units: theoretical profit = 30,000 RMB. After fees, stamp duty, and FX costs (~0.10 RMB/unit), net profit ≈ 20,000 RMB.

Conclusion: HSCEI suits short-term arbitrage; Southern A50 suits steady allocation.

III. Practical Differences: How HK vs. Overseas Investors Can Play

• Account opening: Through local brokers or online brokers (e.g., Tiger Brokers Hong Kong), then activate Northbound Trading. No capital threshold.

• Trading paths:

  • Directly trade Hong Kong ETFs.

  • Or use Northbound to trade A-shares/ETFs.

• Advantage: With Northbound, you can arbitrage directly between A-shares and their HK-listed counterparts within a single account.

Steps to start:

1. Open a Tiger Brokers account and fund it. With one account, you can seamlessly trade A-shares, HK stocks, and U.S. stocks.

2. Search for the stock or ETF you want and click to trade.

3. Choose your order type; Tiger Trade submits compliant orders for you.

IV. Risk Reminder: Arbitrage ≠ Risk-Free

• Quota limits: Southbound quota RMB 42B / Northbound RMB 52B; once maxed out, trading halts.

• Settlement mismatch: HK = T+0 (same-day buy/sell); A-shares = T+1 (next-day sell). Arbitrageurs must consider timing gaps.

• Liquidity risk: Niche ETFs may only trade a few million daily—hard to move large positions.

• Policy risk: Connect schemes are regulator-driven. Sudden rule changes may eliminate arbitrage windows.

ETF Quick Guide

Conclusion

For overseas investors, Northbound Trading is the express lane into China’s markets.

With it, you can buy A-share giants like Kweichow Moutai and Ping An Insurance, while also using Hong Kong-listed ETFs (e.g., HSCEI, Hang Seng Tech, Southern A50) within the same account.

The biggest advantages:

• Simplicity: No complicated cross-border procedures; just open an account with an eligible broker.

• Diversity: Access both A-share blue chips and HK ETFs at low cost.

• Arbitrage potential: Capture spreads when A-share and HK prices diverge.

In the global investment landscape, mastering this “passport” is like holding a key card to China’s asset allocation game.

Invest in China with Tiger—your one-stop solution

Bullish on China but not sure how to allocate? With one Tiger account, you can invest in a range of China-related assets:

A-shares Connect: $HUATAI-PINEBRIDGE CSI 300 INDEX TRADING SECURITIES INVESTMENT FUND(510300)$ ; $CARD IN 500 EXCHANGE-TRADED INDEX SECURITIES INVESTMENT FUND(510500)$ ; $E-FUND GEM TYPE OPEN INDEX TRADING SECURITIES INVESTMENT FUND(159915)$ $Contemporary Amperex Technology Co.,Ltd.(300750)$ ; $Kweichow Moutai Co.,Ltd.(600519)$

Hong Kong Market: $Xinjiang Tianshun Supply Chain Co.,Ltd.(002800)$ $HSCEI ETF(02828)$ $CAM MSCI A50(02839)$ ; $TENCENT(00700)$ , $MEITUAN-W(03690)$ , $CHINA MOBILE(00941)$

US Markets: $Xtrackers Harvest CSI 300 China A-Shares ETF(ASHR)$ , $KraneShares CSI China Internet ETF(KWEB)$ , $iShares China Large-Cap ETF(FXI)$ , $Alibaba(BABA)$ , $BIDU-SW(09888)$ $PDD Holdings Inc(PDD)$

In addition, Tiger Trade’s signature features—TigerAI and Recurring Investment—make it easier to build exposure to Chinese assets:

• TigerAI Investment Assistant: New to Chinese assets? Ask anytime—e.g., “Which ETFs track the CSI 300?” or “Which China ADRs are trending lately?”—and get answers instantly.

• Recurring Investments for HK stocks & ETFs: Worried about timing? Tiger Trade supports daily/weekly/monthly recurring plans for Hong Kong stocks and ETFs to average your cost, build long-term positions, and pursue steadier outcomes.