China makes typically thorough preparations for onshore market

Thu Oct 18, 2012

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The China hedge fund market is on the cusp of explosive evolution


By Aradhna Dayal

nullLast month, on my way to Beijing and Shanghai to speak at a key global event, I faced an unexpected hiccup. After waiting for seven hours on the runway, we were informed that all flights to China had been put on hold as Beijing closed off all landing slots. Whether it was because of the VVIP movement due to a high-profile global event taking place in China at that time or due to any other reason, one thing was clear: the government influence on anything and everything in this country is supreme.

However, when we did finally get to Beijing some 10 hours later, the airport had made several arrangements to fast-track the exit of the bleary-eyed passengers. Which confirms another core belief about China — that there is tremendous foresight and organisation in everything that the Chinese authorities undertake. Little surprise, then, that during my time in China I witnessed some of the most pioneering work and progressive thinking that is going into the development of a world-class hedge fund industry in the country.

During my trip, I had the privilege of having several candid, though off the record, conversations with some of the best brains in the country (both at the government and industry level) that are working on ground-breaking initiatives such as the QDLP programme. And it was clear that China is opening its doors to foreign hedge funds as much to learn from them and create its own international-calibre hedge fund industry domestically, as to give them entry into one of the most promising markets in the world.

Foreign managers may view QDLP as the next sluice gate, allowing them for the first time to access the large capital pool in the country and invest it overseas. But the Shanghai government is looking at QDLP to bring experienced global hedge fund managers on the ground, and create an ecosystem for adequate skill and knowledge transfer, thus paving the way for a viable and talented onshore hedge fund industry.

The Chinese regulators understand the value of imbibing best global practices and key hedging skills from international managers, and clearly want the local hedge fund managers to understand concepts such as shorting, leveraging and other fundamentals of hedge fund investing, before allowing a full spectrum of hedge fund trading in the country.

Indeed the pace of regulatory easing has quickened in the past few years, with the industry having seen more reforms (or steps in that direction) in the past two years than in the past decade. Short-selling and margin lending has begun on a limited basis, the Shanghai government is working on the pilot QDLP programme, and hedge funds may even be allowed to list in China soon.

Those of us who remember the opening up of China’s mutual fund market in early 2000s will remember the tremendous local response of the Chinese investors to the newly allowed mutual funds there, and explosive growth in that market thereafter (the first open-ended fund by Huaan Fund Management in October 2001 raised a record $609 million in its first week).

The mutual fund deregulation also shows the scientifically precise and progressive approach the Chinese government takes to these sorts of reforms: it waits and watches for the right moment, all the while learning from the West, and once the skillsets are in place, opens up the market at a maturity level that would perhaps take Western markets decades to arrive at.

This makes me think that China’s hedge fund sector, as and when it is opened to overseas and local hedge funds, could lead to a thriving hedge fund culture and a true investment alternative for the country’s growing wealth – both at an individual and institutional level.

Having said that, many questions remain, such as: When will more hedging instruments be allowed? Will QDLP only be limited to HNWs and a handful of institutions? Will global hedge fund firms need to create new products for the China market? And how will the distribution, tax assessment and repatriation of funds work under the QDLP system? I see this as nothing short of a historic opportunity. The China hedge fund market is on the cusp of explosive evolution, and firms that spend their energies understanding this unique market and having strategic partners in place, will indeed have an edge.

Read more on this in our feature on China in this issue of AsiaHedge. We also showcase some of the strongest performers of the month, including NT Asset’s Asian Discovery Fund.

Finally, we bring you the final nominations for the AsiaHedge Awards 2012, and look forward to seeing you at the Awards night on 25 October in Hong Kong.

ISSN: 2151-1845 / CDC10004H