Shanghai has allowed six global hedge funds to raise yuan funds for overseas equity investments, likely to direct a capital outflow worth a combined US$3 billion.
The city, which is aiming to transform itself into a global financial centre by 2020, officially embarked on a long-awaited qualified domestic limited partner (QDLP) scheme after obtaining approval from state regulators.
Under the pilot run of the QDLP programme, foreign hedge funds may raise yuan capital in Shanghai through local branches and then convert the capital into foreign currencies to make investments in overseas equities.
According to two people involved in the fundraising for the QDLP funds, six international hedge fund managers - including Winton Capital Management, Man Group, Marshall Wace, Citadel, and Och-Ziff Capital Management - were granted QDLP quotas of US$500 million each. The name of the sixth fund that received the QDLP quota is unknown.
It now remains to be seen whether the funds are able to raise enough capital from "limited partners" on the mainland to fill those quotas. Man would not comment on the QDLP matter while the other four companies were not immediately available for comment.
The Shanghai Financial Services Office would not comment on the QDLP progress and a source within the office said Tu Guangshao, a vice-mayor, preferred to be tight-lipped on the financial liberalisation during the initial stages of the pilot programme.
Shanghai began lobbying the central government last year to endorse its proposal for the QDLP project, a move to reinforce its bid to become an international financial hub. The State Administration of Foreign Exchange set an initial total US$5 billion quota for the Shanghai QDLP pilot programme and it is believed the city hopes to see this quota increased.
"There are still technical problems to sort out, such as taxation and regulation," said an official source. "But the policy trend is that officials will encourage more cross-border capital flows through further liberalisation."
Shanghai also aims to enlist the help of the global big names to develop the mainland's hedge fund sector, and a successful trial of the QDLP could be a boost for the domestic hedge fund industry which is still at a rudimentary stage of its evolution.
China has already launched programmes that enable foreign institutions to raise foreign capital to invest in domestic stocks and private-equity funds. The QDLP scheme, alongside the QDII (qualified domestic institutional investor) programme, allows domestic mutual funds to raise yuan capital for overseas equity purchases and were designed for mainland investors keen on allocating part of their funds to foreign stocks and financial derivatives.
"It's a huge market for QDLP investors to tap, with abundant cash looking for proper investment targets," said Howhow Zhang, head of research at fund consultancy Z-Ben Advisors. "Local authorities and foreign funds need to convince cash-rich investors of the benefits from participating in the QDLP programme."
The QDLP scheme follows on the "through train" programme that aimed to allow mainland investors to buy Hong Kong stocks, and represented Shanghai's renewed efforts to facilitate cross-border capital flows.
But the "through train" proposal, which was announced in 2007, has never been implemented owing to objections from the securities regulator which warned state leaders of a potential collapse on the A-share market, given mainland investors' frenzied buying of Hong Kong-listed stocks.