The Shenzhen Stock Exchange is in discussions with Harvest Fund Management Co., one of China's biggest asset managers, about the establishment of an exchange-traded fund based on the Shanghai-Shenzhen 300 Index.

The move, first reported on the Chinese investor Web site, cnstock.com, provides a glimpse of an interesting battle taking shape between the two big Chinese stock exchanges as ETFs become higher profile among Chinese investors.

The Shanghai-Shenzhen 300 Index is a composite index of the biggest stocks on both the Shenzhen Stock Exchange and the Shanghai Stock Exchange.

In August, the Shanghai Stock Exchange and AIG-Huatai Fund Management Co. filed an ETF application with the China Securities Regulatory Commission for a similar ETF. Because the index itself is split between listings on the rival exchanges, the ETF application included a twist.

The application explained that shareholders of the Shanghai-listed stocks in the index could buy and sell ETF shares with such stock holdings, but shareholders of the Shenzhen-listed stocks could only exchange ETF shares with cash.

Chinese analysts told cnstock.com that the August ETF application was not made in cooperation with the Shenzhen Stock Exchange.

Three months later, the Shenzhen Stock Exchange is reportedly responding by teaming with Harvest Fund Management to create its own ETF based on the index.

Deutsche Bank, already huge in the European ETF market, owns a 19% share in Harvest.

If the two Chinese exchanges launch competing Shanghai-Shenzhen 300 ETFs, the Shanghai-based ETF might have a big edge: Approximately 75% to 80% of the index's weighted stocks are listed in Shanghai.

Overall, the Chinese ETF market has grown, but is still small compared with the ETF markets in Japan, Hong Kong and South Korea. China had $2.6 billion in ETF assets across five primary ETF listings, through the end of the third quarter, according to Barclays Global Investor's ETF Research and Implementation Strategy Team.

That placed China fourth in ETF assets among Asian nations, behind Japan, Hong Kong and Singapore. It is further down the Asian ETF rankings in number of listings. Taiwan and India have less in ETF assets than China, but more total listings, with 11 ETF listings in each market.

The Shanghai Exchange is moving on other fronts related to the introduction of ETFs also. It just announced an agreement with The Stock Exchange of Hong Kong Limited to facilitate the development of the two exchanges, financial products and regulatory rules.

Hong Kong is one of the largest ETF markets in Asia, and U.S. ETF company State Street Global Advisors already cross-lists ETFs in Hong Kong. ETFs are one of the specific product areas in which the two Chinese exchanges are expected to coordinate efforts.