How foreign hedge funds get round tight investment rules to play China’s stock markets

Hundreds of foreign hedge funds and traders are working in a regulatory grey area in China, using speculative trading strategies that are complicating regulators’ efforts to calm the country’s turbulent stock markets.

Interviews with more than a dozen foreign hedge funds, proprietary traders and consultants reveal foreigners are active on a large scale in Chinese stocks, despite tight investment rules designed to limit their activities.

Foreign hedge funds have found legal ways to bet on Chinese stocks and derivatives without going through formal investment channels which prevent them using strategies such as short-selling, blamed by some authorities for the sell-off.

“With current market volatility and weak retail investor sentiment, these hedge fund strategies would naturally lead them to sell the market, which is against the government’s intention of propping up the market,” said Oliver Barron, China market analyst at investment bank NSBO in Beijing.

Since peaking in June, the Shanghai and Shenzhen markets have fallen nearly 30 per cent, triggering a crackdown on “malicious” short-selling and a probe into automated trading practices commonly used by hedge funds.

Hedge funds and proprietary traders boost market liquidity and form part of any healthy stock market, but analysts say they can have an outsized impact on China’s exchanges which lack a stabilising base of buy-and-hold investors.