China's approval of short sales and stock index futures paves the way for foreign investors to bet on a convergence in valuations between Shanghai and Hong Kong.

The China Securities Regulatory Commission cleared the overhaul of trading laws on Jan 8 that will also permit buying equities with brokerage loans. The rules apply to mainland residents and the 94 international institutions authorized for mainland trading by the government.

Allowing investors to profit from share declines will make trading more efficient in the mainland and may eventually reduce the valuation gap with Hong Kong, where an index of mainland-based companies is priced at a 38 percent discount, according to ING Groep NV.