Chinese financial regulators have decided in principle to allow global hedge funds to raise capital on the mainland, with two conditions: they must register the hedge fund in Shanghai, and only invest in markets outside mainland China.
According to people familiar with the matter, the Shanghai Municipal Office of Finance Service, the key driver of the city's plan to become a global financial centre by 2020, has received guidelines from mainland securities and foreign-exchange regulators that will allow foreign asset management firms to apply to set up yuan-denominated hedge funds.
Such funds often place short-term bets and are therefore speculative by nature.
Many foreign hedge funds have found it more difficult to raise money from Western investors since the 2008 global financial crisis, which hit the hedge fund industry badly, particularly in the United States.
Raising capital on the mainland is attractive because it will give the hedge funds another avenue for cash, even if it comes with potential foreign-exchange risks from converting yuan to other currencies such as US dollars, and then back into yuan when it comes time to repay the Chinese investors.
Beijing already allows foreign investors to operate yuan-denominated private equity funds on the mainland. Those funds, which usually take a long-term view, must be invested onshore.
