Updated, 7:33 p.m. | China, which has been gradually opening up its financial system, is about to let foreign hedge funds stick a small toe in.
Regulators in the city of Shanghai have agreed to let a group of American and British hedge funds operate in China as part of a pilot program, according to people briefed on the program. The funds are expected to be able to raise $50 million each from Chinese institutions to invest around the world, these people said.
“It’s just the first step. The notion of the floodgates opening is not something you can reconcile with the developments of the markets in China,” said Pierre Lagrange, chairman of the Man Group Asia. The Man Group, based in London, is the only one of the six funds to confirm that it has been chosen by Chinese authorities.
Regulators have also granted Oaktree, Och-Ziff, Citadel and Canyon Partners, all based in the United States, and the British company Winton Capital permission under the test program called the Qualified Domestic Limited Partner program.
It is just one move that Chinese officials have taken in recent months to begin dismantling some barriers that separate their country from global markets. Still, it will be an important test as regulators define the parameters of what foreign funds can and cannot do.
“I think everyone and their mother wanted to get in, and we’re very happy and proud to have been selected,” said Mr. Lagrange, who is also co-founder of GLG Partners and oversees the Man Group’s long- and short-equity strategy. The fund has been seeking approval in China for several years, he said.
If the program is successful, it will open the door to the world’s biggest population of savers, who are still largely out of reach to the rest of the world.
“If you look at the pyramid of age — in China, you will have an aging population” that will demand certain wealth management products, Mr. Lagrange said.
But for now, authorities are taking a cautious approach in the financial services sector because of many moving pieces.
One of those pieces is China’s currency, the renminbi, which is carefully controlled and trades within a tight band against the dollar. Authorities have a handful of tools they can use to keep the currency stable, including controlling how much money flows in and out of the country.
These capital controls mean that Chinese savers have limited options for investments.
China’s biggest banks have stepped in to fill space, selling wealth management products that offer clients higher rates than bank deposits. The products are not officially recognized and help make up China’s estimated $6 trillion shadow banking industry.
Recent financial reforms are part of policy makers’ efforts to channel those savings out of unregulated investment products and speculative real estate.
As a new financial landscape silently evolves, Wall Street and other financial hubs are watching closely.
News of the trial program was first reported by the 21st Century Business Herald, a Chinese newspaper. The hedge funds requested to be able to raise more than the initial $50 million, but Shanghai’s regulators are still testing the waters, according to the report.
As part of China’s effort at reform, Shanghai is expected to announce a free-trade zone in the coming months, which would make it easier for other financial services firms to tap what is expected to be the biggest source of wealth for decades to come.
“When you talk with clients over there, they have the same questions as foreign investors, such as, ‘how do I transfer my savings from my bond portfolio in this end of cycle for the bond trend and into something more lucrative than cash,’ ” Mr. Lagrange said.
“That’s where hedge funds should fit in and are fitting in,” he added.