China is looking to allow hedge funds into the country for the first time, which could open up one of Asia’s biggest capital markets to foreign investors
The world’s second biggest economy encourages long-term investors such as foreign insurers and pension funds to invest directly into its stock markets.
But up until now hedge funds have not been allowed direct access to China markets, as regulators frown upon the volatility they add with their short-term speculation.
However, it seems Chinese regulators are warming up to hedge funds after the China Securities Regulatory Commission (CSRC) said it is considering lowering the bar for smaller financial firms like hedge funds.
It is drafting proposals to expand the types of investors that can be granted a licence to trade stocks, known as a Qualified Foreign Institutional Investor (QFII).
Under current rules it is very difficult to qualify as a QFII. An institution must have at least US$5 billion (£3.1 billion) in assets under management and have been in business for at least five years to qualify for a licence.
The thresholds for banks and brokerages are even higher.
But the regulator is looking to reduce the minimum requirement for assets under management. This would mean that many smaller funds, including certain hedge funds that currently do not qualify for the programme, could apply for QFII status.
A Singapore-based hedge fund employee said: “Allowing hedge funds to operate in China would fit in with the regulator’s push to clean up the financial industry, make it more professional and allow greater freedom for the flow of cash in and out of China.
“China is the world’s second biggest economy and lots of companies want to list there so any hedge fund would love direct access to this market. It could spawn a new hedge fund community given China’s exciting potential.”
There are about 2,400 Chinese stocks with a combined value of US$4.1 trillion (£2.5 trillion).
Currently, many hedge funds are accessing the Chinese market via local brokers, who use their own QFII quotas to purchase stocks or bonds on behalf of their clients.
China has slowly been opening up its tightly controlled financial markets to foreign investors. In April it doubled the amount that foreign investors can invest in domestic markets while last week it agreed to raise the ownership cap for foreign investors in domestic brokerages from 33 per cent to 49 per cent.
Read More: Telegraph