Fundraising setback by foreign funds casts pall over through train scheme

Of the six funds allowed to raise yuan capital for overseas investments, only two fulfil the quota

PUBLISHED : Monday, 21 April, 2014, 1:23am
UPDATED : Monday, 21 April, 2014, 2:11am

In a grim precursor to the much-awaited through train scheme, the first batch of foreign hedge funds allowed to raise yuan capital on the mainland for overseas equity purchases under the qualified domestic limited partner programme fell short of expectations.

"Shanghai financial authorities had attached great importance to the [programme] as officials thought wealthy mainlanders were keen on Hong Kong and other overseas stocks," said an official with the local financial service office. "The woeful fundraising came as a rude shock."

Shanghai created the QDLP idea in 2012 as part of efforts to showcase the city's reform thrust.

The scheme allowed select foreign hedge funds to raise yuan capital for investments abroad. The State Administration of Foreign Exchange granted the six hedge funds a quota of US$50 million each as Shanghai started the programme on a trial basis.

Only two of the six big-name global hedge funds fulfilled the quota, according to sources with knowledge of the QDLP fundraising process.

The six funds - Winton Capital Management, Man Group, Marshall Wace, Citadel, Och-Ziff Capital Management and Canyon Capital - were widely expected to hit the quota, which would pave the way for other players to join. The SAFE has slated a total quota of US$5 billion for the pilot run of the scheme.

However, only Citadel and Canyon Capital are said to have raised US$50 million each.

"We don't need the QDLP to buy Hong Kong-listed shares," said Wang Xin, owner of a trading business in Shanghai. "There are several existing channels for us to sidestep the regulations for investments in Hong Kong stocks and the QDLP doesn't appear to be an ideal option due to the tight supervision on the whole process."

Beijing has yet to liberalise the yuan's capital account, which means money cannot leave the mainland for equity purchases elsewhere. However, investors in Shanghai can transfer their money abroad through underground banking systems or take advantage of the regulatory loopholes to invest in overseas-listed shares or funds.

For example, Shanghai residents can convert their yuan assets into foreign currencies equivalent to US$50,000 a year before remitting the money to foreign bank accounts.

On April 10, the Shanghai and Hong Kong stock exchanges announced the "through train" scheme would be introduced in six months, which would allow investors to cross-trade designated stocks on each other's market, giving mainlanders easier access to Hong Kong-listed shares.

But the tepid response to the QDLP programme indicates the demand could be overrated.

"Those interested in Hong Kong shares are already in that market," said Howhow Zhang, the head of research with Z-Ben Advisors. "It will be wrong for both markets to expect a great fund inflow."