China should legalise hedge funds and bring in more private equity funds in order to develop the country’s futures market, a Beijing-based university professor has argued [via Bloomberg].
Professor Hu Yuyue, head of the stock futures research center at the Beijing Technology and Business University, made the call at an investment conference in Beijing yesterday.
“The futures market is plagued by a small range of products, limited size and the dominance of retail investors,” said Hu. “Individuals don’t understand well the risks involved in trading futures. We need institutional investors like hedge funds to drive the market.”
Overseas funds are currently allowed to set up representative offices in the country, Bloomberg reported, but those offices can only conduct market research and are banned from placing any trading orders. Funds focusing on China typically register in another jurisdiction, such as Hong Kong.
But it’s not just the regulatory framework that will have to change for China to attract hedge funds and increased private equity flows.
Some of the biggest investors in Asian hedge funds have been shunning China-focused managers that are thought to have engaged in unlicensed trading activities in the country’s buoyant stock markets.
Firms such as KBC Alpha Asset Management and Tokyo-based Sparx Asset Management have decided not to invest in several top-performing “Greater China” funds, citing the potential regulatory risks facing managers that have operations in mainland China.
Despite the lack of legal recognition, about 20 firms have set up research teams in China with the pure — and legitimate — function of feeding investment ideas to their overseas head offices. But there are also firms that have allegedly shifted their main operational activities to their Chinese subsidiaries, including unlicensed activities such as placing orders to buy and sell A-shares, the class of Chinese equities set aside for Chinese nationals.