As reported by Reuters, a proposed plan by China's regulators could allow hedge funds, for the first time, to directly trade in mainland stocks and bonds, opening up one of Asia's biggest capital markets to the $2 trillion industry.

Shanghai-based Boss & Young partner Hubert Tse believes that if the reports are true, then it is “good news” for foreign hedge funds in China. “It’s not only the fact that they can trade A-shares via the QFII [Qualified Foreign Institutional Investor] programme, but more importantly it is that the regulators are opening their arms to global hedge funds and PE funds for them to participate in the  further opening up  of the Chinese capital markets. That, in my mind is fairly significant," he says.

The China Securities Regulatory Commission (CSRC) is considering a proposal to lower the bar for obtaining a licence that allows foreigners to buy securities in the country, said two industry sources with knowledge of the regulatory agency's thinking on the issue.

“My guess is they may lower the US$5 billion threshold so small to medium-sized foreign hedge funds and PE funds may be eligible to apply, though it means smaller foreign institutional investors can also apply," says Tse. "There may be other measures put in place to manage volatility and speculative activities, as this is probably the last thing the CSRC wants to see if the market is opened up.”

The securities regulator is also looking at expanding the types of investors that may be allowed to obtain the QFII licence, as part of efforts to broaden the programme, Wang Lin, a senior CSRC official, was quoted by the official Shanghai Securities News on May 9 as saying.

“With China looking to attract more long term foreign capital and accelerate cross-border investments, the CSRC has recently raised the total QFII quota and may also look to increase the diversity and breadth of the QFII base to include hedge funds and PE funds as China continues to deepen reform of the capital markets,” says Tse. However, he emphasises the regulator will likely be cautious towards hedge funds and PE funds due to their short term investment natures.

The move to expand investor types could pave the way for hedge funds to gain direct access to one of Asia's biggest stock markets, where a growing number of companies are seeking a listing. Some 2,400 China stocks tracked by Starmine have a combined market value of $4.1 trillion compared to $3.6 trillion of 2,500 Japan stocks. ALB 

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