Yesterday was a marquee moment for China’s two stock exchanges, with investors allowed to short ETFs for the first time and the number of securities targetable for margin trading and lending more than tripling.

The move is expected to drive demand for exchange-traded funds, paving the way for more launches, as well as increase the number of trading strategies rolled out by professional investors.

New trading guidelines published by the Shanghai and Shenzhen exchanges on November 25 became effective yesterday, with the number of targetable securities for margin trading and lending rising from 90 (as from the scheme’s launch in March 2010) to 285.

This includes the country’s seven largest ETFs, namely the SSE50, SSE180, SSE Dividends and SSE Corporate Governance in Shanghai, and the SZSE100, SZSE mid- and small-cap and the SZSE Composite in Shenzhen.

These ETF products were the only ones to meet the eligibility criteria that they had been listed and trading for more than three months, had more than Rmb2 billion ($314 million) in assets under management and each had over 4,000 subscribers.

These seven products are managed by six fund management firms: China Asset Management Company, E Fund, HuaAn, Huatai Pinebridge, Southern FMC and BoCom Schroders.

Permitting shortable ETFs enables Chinese equity investors to profit in a downward market, as well as hedge their risk and take advantage of arbitrage opportunities between ETFs and stock index futures or baskets of securities with high correlation.

To engage in margin trading and securities lending, investors must have more than Rmb500,000 in their securities accounts and have been actively trading for at least 18 months. Unsurprisingly, the market has largely been the preserve of institutional and professional investors.

David Xu, managing director of passive investment at HuaAn, points out that at present about 60% of investment into ETF funds in China is from institutional investors, adding: “They are more likely to be the first batch to participate in the margin-trading and securities lending of ETFs.”

He believes allowing investors to take long and short positions in ETFs will drive trading in the products and as such increase demand for them. “The new rules will generate a positive impact for the whole ETF sector,” he suggests.

One ETF fund manager who preferred not to be named says ETFs will become targets for margin trading and securities lending by FMC segregated account managers and managers of collective investment schemes run by securities firms.

But he does not expect this to happen any time soon since he considers the guideline requirements to be rather restrictive.

However, he is less certain that the move to allow investors to go short or long on ETFs will have quite the positive impact some observers are predicting for the ETF industry.

“The seven ETFs in the first batch are the largest players in the market and the new rules will only help them to grow stronger,” he states. “If total market demand remains constant, the remainder of ETF funds may simply appear relatively weaker.”