Taiwan's financial regulator yesterday approved the issuance of Hong Kong exchange-traded funds (ETF) in the island's stock market, a move expected to accelerate cross-strait investments. A final agreement on cross-trading of ETFs between the mainland and Taiwan stock markets is expected to be signed as early as next month. Market watchers said it would be a milestone in efforts to achieve deeper co-operation between the two financial markets. The Securities and Futures Commission said yesterday it had signed and exchanged a side letter to a bilateral memorandum of understanding with the Taiwan Financial Supervisory Commission to facilitate cross-listing of ETFs in the two markets. Younger Chen, a director of the asset management division of Taiwan-based Polaris Securities (Hong Kong), said the agreement could encourage more Taiwan investors to buy H shares and red-chip shares. 'It represents a key step to formalise a legal platform [for Taiwan investors] to invest in stocks with mainland exposure,' Mr Chen said. 'The linkage with Hong Kong will provide useful support for a formal opening from China in the future.' David Jiang, the chief executive of Bank of New York Mellon Asset Management Asia-Pacific, said agreements such as this would lead to more capital flows between Taiwan and Hong Kong and, eventually, the mainland. 'While flows to ETFs have grown tremendously in the US and Europe, the total market size in Asia is still about one-tenth that of the US and one-fifth of that in Europe,' Mr Jiang said. 'However, it will take some time before flows are significant.' Until now, Hong Kong investors could invest in the Taiwan stock market by opening nominee accounts through Taiwan brokerages. But market participants indicated that local investors were not keen on buying Taiwan stocks. 'The Taiwan market is totally different from the Hong Kong stock market, whether its investment methodology or trading patterns,' said a fund manager. 'Taiwan investors are interested in buying industrial and technology stocks, while Hong Kong investors are particularly keen on China-focus stocks only.' According to the Hong Kong stock exchange, there are 29 ETFs listed on the local market but only one is issued from Taiwan. Shanghai has three ETFs listed on the stock exchange while Taiwan has 11, many of them are benchmarked against domestic stock indices. An ETF is an investment product backed by a portfolio of stocks trading on the domestic stock exchange. Taiwan stock exchange chairman Schive Chi said the exchanges of Taiwan, Hong Kong and the mainland were planning to jointly compile a Greater China index as a benchmark for ETFs. Meanwhile, under the sixth supplement to the closer economic partnership arrangement signed this month, Beijing is exploring the introduction of ETFs with exposure to Hong Kong-listed stocks trading on the Shanghai stock market.