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In a continued effort bid to make Shanghai the financial capital of the 21st century, the Chinese government has approved “in principle” the creation of stock index futures, trading on margin, and short selling. Although the Chinese government has had reservations about allowing short selling for some time, the move will allow the government to continue its push to bring financial firms to Shanghai and hopefully encourage the average Chinese citizen to invest in equity markets instead of keeping the majority of their money in low interest accounts at state owned banks.

These new techniques could help Chinese investors diversify their portfolios and reduce some of the volatile price swings that the Chinese market has seen over the past few years. Mainland China’s benchmark Shanghai Composite index almost doubled in 2007, slumped 65% in 2008 before rebounding about 80% last year. The news could also be a positive development for Chinese financial firms which stand to benefit from the new profitable innovations that will now be available to investors.

The relatively new Global X China Financials ETF (NYSEARCA:CHIX) offers U.S. investors a way to play China’s financial sector, investing in the country’s largest banks. Since its inception, CHIX has performed nicely, gaining about 7% over the last three weeks. The ETF, which charges an expense ratio of 0.65%, has 25 holdings spread across banks (44%), real estate (31%), and insurance companies (24%).

Disclosure: No positions at time of writing.

Source: ETFs Coming to China?