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It looks like hedge funds will soon jump over the Chinese hedge! Word around the hood is that China is looking to allow more foreign institutional investors to operate in the country.

But I guess the news comes as no surprise. After all, we’ve talked about how the Chinese government has taken other steps to open up its markets to foreigners.

On top of that, China has been encouraging foreign investors and pension funds to directly trade in the country’s stocks and bonds. However, hedge funds, known for carrying out aggressive investment strategies, have never been allowed to operate in the country.

Some say that the situation is about to change very soon though.

It was recently confirmed by the China Securities Regulatory Commission (CSRC) that it is taking into consideration a proposal to issue more Qualified Foreign Institutional Investor (QFII) licenses.

These are granted to foreign investors who wish to trade yuan-denominated shares in China’s mainland stock exchanges in Shanghai and Shenzhen.

Other than that, a few more tweaks have been proposed to make the application process for QFII licenses more investor-friendly. If the government decides to push through with them, the move could pave the way for hedge funds to gain access to China.

It can’t be denied that the qualification requirements for hedge funds are pretty strict.

The criteria require that all institutions apart from banks and securities brokerages must have at least $5 billion worth of assets under management. Aside from that, firms must also have been running for at least five years.

But even those qualified under the CSRC’s criteria also have a hard time getting their licenses as China has shown that it hasn’t been so willing to issue them to hedge funds.

For instance, a New York-based hedge fund called Och-Ziff Capital Management is still waiting for its QFII license which it applied for a few years back.

But as I said, all that could change under the new initiative, which promises to ease those qualification requirements and give other firms a fighting chance. For example, it was proposed that the $5 billion asset requirement be lowered which would allow smaller hedge funds to apply for their QFII licenses.

With that, a larger number of QFII-licensed firms would mean that industry watchdogs will widen their scope for monitoring and implementing regulations. This would be in line with their goals to professionalize the industry and to better facilitate capital flows in and out of the country.

So why is this important?

For one, allowing more hedge funds to operate in China could also translate to stronger demand for yuan-denominated assets and the Chinese yuan itself.

As I have pointed out in my article about the approval of three Chinese banks’ operations in the U.S., these recent moves by China could pave the way for more yuan flexibility down the road. Heck, it could even transform the yuan into a commonly-traded currency!

On top of that, the move could also even out the playing field and address the issue of global trade imbalances. Remember that with an undervalued currency, Chinese exporters enjoy an unfair trade advantage because their products are relatively lower compared to those of their counterparts.

But let’s not get ahead of ourselves. These proposals are still subject to the Chinese government’s approval and hedge fund owners themselves might not be so open to the idea of additional regulation.