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China is capital rich and asset class poor, this is great news for the hedge fund industry

Neil Griggs, Partner, Financial Services Group, BDO LLP comments on China signalling further easing of domestic capital markets…

In terms of capital markets, China is like a greenhouse – largely protected from bad weather and fuelled by the sunshine of growth, everything in the greenhouse flourishes. To a point. Without the usual market forces and with nowhere for the heat to go, the greenhouse gets hotter and harsher and such an environment is simply not sustainable. The Shanghai municipal government’s Qualified Domestic Limited Partner (QDLP) is another step forward in China’s ambition to open up the vents and let the air circulate. This move allows domestic Chinese investors access to overseas hedge fund products.  
China is certainly not opening up its doors fully at this stage, with the total outward investment limit (USD5bn) considered relatively underwhelming, with only three or four of the largest global alternative fund managers likely to receive the initial license required to play. Furthermore, it’s likely that the USD5bn will be limited to qualified investors and will be quickly utilised by institutions rather than the cash rich middle class.
However, given China is capital rich and asset class poor, this is great news for the hedge fund industry. The global market is hungry to access the Chinese investor base, so regardless of the cautious implementation, this will be considered a step in the right direction by many alternative investment managers. However, it is unlikely the authorities will announce open season until the domestic hedge fund manager is in a position to compete with the foreign manager.

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