* China lets ETFs trade in Hong Kong, Shanghai and Shenzhen
* Two funds approved to launch funds tracking HK indexes
* Yuan-denominated RQFII funds to track Hong Kong A-shares (Adds background, comment from analysts)
By Lee Chyen Yee and Pete Sweeney
HONG KONG/SHANGHAI June 29 (Reuters) - China has approved mutual listings of exchange-traded funds (ETFs) on Hong Kong and mainland exchanges, part of Beijing's plans to boost financial exchanges on both sides, Hong Kong's Securities and Futures Commission (SFC) said on Friday.
The long-expected regulatory nod comes as Chinese President Hu Jintao is visiting Hong Kong to attend the ceremony marking the 15th anniversary of the city's return from British rule.
"The SFC welcomes the China Securities Regulatory Commission's approval today of two ETFs to be listed on the Shanghai and Shenzhen stock exchanges that will invest directly in Hong Kong-listed stocks, each tracking a Hong Kong stock index," the SFC said in a statement.
Chinese investors can already buy overseas stocks and bonds through funds available under the Qualified Domestic Institutional Investor (QDII) programme.
However, the newly approved products, which are part of the QDII programme, are likely to be more liquid because ETFs can be traded on Chinese bourses much like stocks.
Two fund management companies have been approved by the CSRC to create funds to track Hong Kong indexes.
E Fund Management Co will launch an ETF that tracks the Hang Seng China Enterprises Index, to be listed on the Shanghai stock exchange.
China Asset Management Co will launch a similar product that tracks the Hang Seng Index, to trade on the Shenzhen exchange.
The SFC also said it had authorised listing in Hong Kong of the first Renminbi Qualified Foreign Institutional Investor (RQFII) A-share ETFs, yuan-denominated products that will track mainland indexes and trade in Hong Kong.
The Chinese securities regulator, known as CSRC, had given approval in April but the SFC waited until Friday to give its nod.
Having the new type of ETFs available will "broaden the range of renminbi investment products in Hong Kong, offering Hong Kong investors an alternative channel to invest in the A-share market," said Mrs Alexa Lam, the SFC's deputy chief executive officer and executive director of policy, China and investment products.
Chinese fund managers have been preparing for the launch of cross-border ETFs for years. Other ETF products in the pipeline are designed to track some of the world's top indices including the Standard & Poor's 500 index, the Dow Jones Industrial Average index, the FTSE 100 Index and Japan's TOPIX Core 30 index.
Some analysts said that the impact of cross-border ETFs may be limited initially as many Chinese investors, burned during the 2008-2009 financial crisis, remain wary about overseas investment.
"We think that these ETFs will not see that much demand from investors. If you look at the correlation between domestic and Hong Kong market performance, it's very high, plus a lot of companies listed in Hong Kong are Chinese anyway," said Winnie Deng, analyst at Z-Ben Advisors, which covers the offshore yuan fund market.
"Also everybody is getting out of equities, so investors will probably not will be there to support the launch of the first two funds," she added.
China's foreign exchange regulator has approved a combined QDII quota of $76.4 billion as of April 16.
At present, applications are capped at $1 billion per fund, but fund management companies have been hoping Beijing radically increases the cap to around $5 billion, Deng said.
(Additional reporting by Alison Leung in HONG KONG and Samual Shen in SHANGHAI; Editing by Richard Borsuk)
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