China gives cautious welcome to global funds

Global hedge funds are now being given access to Chinese investors – but change in China is still a gradual process

China’s recently proposed financial reforms and the imminent launch of its qualified domestic limited partner (QDLP) programme are further signs of the ongoing liberalisation of its capital account and the continued promotion by the People’s Bank of China of inbound and outbound capital flows.

The QDLP programme was made public in September. It gives six leading global hedge funds approval from the Shanghai regulator to raise US$300 million of capital on the mainland. This ushers in a significant new era for the US$2 trillion global hedge fund industry, as it opens the door to Chinese institutional and high net worth investors.

Unlocking China’s potential

Recent surveys by CMB and Bain Capital indicate that a potential RMB22 trillion is available for investment from the Chinese high net worth sector. Meanwhile, the RBC/Capgemini 2012 World Wealth report provides further scope for optimism: it says the population of high net worth individuals in the Asia-Pacific region surpassed that in the US for the first time in 2012.

In addition to the QDLP programme, which is designed to benefit offshore managers targeting onshore capital, the local domestic private fund or “sunshine fund” market also benefited from regulatory changes in 2013.

New provisions enable funds in that market to register with the Asset Management Association of China, a China Securities Commission-sponsored self-regulatory body. Registration has given private funds, legal recognition in China for the first time. The move is a further sign of the evolution of China’s hedge fund industry. The domestic market today accounts for in excess of RMB140 billion (US$22bn) in assets under management.

Another recent initiative that may provide future benefits to the Chinese alternative fund industry is the launch of the Shanghai Free Trade Zone on September 29, 2013 by the state council. Companies within the FTZ will benefit from lower preferential tax rates and enhanced conversion of the RMB.

Taking a long term view

These initiatives are expected to generate exciting opportunities – but first movers looking to target the Chinese market will need to adopt a long term view. The evolution of the Chinese hedge fund market will take time, and its maturity is still some way off. Many political and regulatory challenges still need to be addressed. Foremost among these issues are China’s capital controls, which need to be significantly loosened so that China’s managers can utilise true alternative investment strategies.

Although the finer details and rules governing the QDLP program are still in the process of being finalised, Citco Fund Services Shanghai Limited has been actively involved in the development of the program for the past two years, and is in a prime position to support Citco’s clients as they look to venture into Chinese markets.

The initial firms involved in the QDLP programme include Man Group, Winton Capital Management, Oak Tree, Citadel, OchZiff Capital Management Group LLC and Canyon Partners.

Each firm has been granted a $50 million individual quota that can be raised in China and invested abroad. 

By Jeff Li, Managing Director, Shanghai and Niall Fagan, Director, Citco Alternative Investor Services (CAIS) Asia

27th February 2014