It was back in May that the first reports that China’s securities regulator was considering allowing foreign hedge funds entry into the large and lucrative capital markets. Now China has given foreign hedge funds permission to access to it’s wealthy citizens, hoping to entice them to invest their money overseas.
This is considered to be an important step by China to open its capital account which is part of a process which will involve the strict regulations that separate China from international markets. Though the process has been slow and over a long period of time its there has been a perceived quickening of pace, the hedge fund move being the boldest so far.
Like other similar economic reforms in China, the hedge fund programme will also be introduced in a slow and cautious manner, with the introduction of a ceiling, limiting the amount that can be raised collectively. Interestingly, it is thought that rather than dispersing the amount in a balanced manner between the licensed hedge funds, they will be allowed to fight it out for the biggest chunk of the overall amount. This, it is hoped, will incite further and more intense market competition which contrasts to China’s equity investment programmes where the quotas for each institution are centrally managed by it’s regulators.
It is thought that China will only allow the world’s biggest hedge funds, with a minimum of $10 billion assets under management. The reform, which China has labelled the Qualified Domestic Limited Partner programme extends the invitation for hedge funds to apply for licences to register in Shanghai.
By China opening the doors to foreign hedge funds will, it is anticipated, help to serve the Chinese government which is trying to deflate the real estate bubble, which is considered the only safe and viable investment within China. The domestic stock markets is considered highly risky and the corporate bond market is not highly developed.