Green light for hedge funds to raise yuan capital

Foreign players to be allowed to set up in Shanghai to attract financing, but they must only invest abroad

George Chen Feb 29, 2012  South China Morning Post

Chinese financial regulators have decided in principle to allow global hedge funds to raise capital on the mainland, with two conditions: they must register the hedge fund in Shanghai, and only invest in markets outside mainland China.

According to people familiar with the matter, the Shanghai Municipal Office of Finance Service, the key driver of the city’s plan to become a global financial centre by 2020, has received guidelines from mainland securities and foreign-exchange regulators that will allow foreign asset management firms to apply to set up yuan-denominated hedge funds.

Such funds often place short-term bets and are therefore speculative by nature.

Many foreign hedge funds have found it more difficult to raise money from Western investors since the 2008 global financial crisis, which hit the hedge fund industry badly, particularly in the United States.

Raising capital on the mainland is attractive because it will give the hedge funds another avenue for cash, even if it comes with potential foreign-exchange risks from converting yuan to other currencies such as US dollars, and then back into yuan when it comes time to repay the Chinese investors.

Beijing already allows foreign investors to operate yuan-denominated private equity funds on the mainland. Those funds, which usually take a long-term view, must be invested onshore.

Western private equity players such as Blackstone and TPG have set up such funds because they want to buy into Chinese firms.

But in the case of the hedge funds, Beijing does not want them investing in the local markets, stoking volatility. They are free, however, to invest in any asset classes offshore. From Beijing’s perspective, it’s a milestone move to further open the nation’s financial industry. ”

The government sees this as a win-win deal,” said a fund industry executive. The government “wants to reduce the size of its huge foreign-exchange reserves, which have become more and more difficult to manage,” he said. “For Western hedge funds, they will find ample capital on the mainland for them to pitch and get.”

That’s partly because wealthy mainlanders, concerned about the mainland’s economic and political outlook, are eager to diversify their assets globally.

The Shanghai finance office will have the power to approve the setting up of a yuan-denominated hedge fund, which will also have to seek a currency quota from the State Administration of Foreign Exchange.

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