China has given six foreign hedge funds the right to raise funds in yuan to invest overseas, a strong move towards opening the country’s economy and internationalizing its currency, writes Amy Li for The Wall Street Journal.

ETF China

Hedge funds quota

The funds will be small at first, limited to just $50 million worth of yuan; it’s not surprising that the ruling Communist Party would take a conservative approach. This program, called Qualified Domestic Limited Partner (QDLP), follows a similar change—introduction of the Qualified Domestic Institutional Investor (QDII)—by seven years, so clearly no one’s in a rush. The QDII, which allows Chinese companies to raise yuan to invest abroad, has a quota of more than $80 billion, but it has been underutilized due to poor performance.

“This is a very groundbreaking development—regardless of the initial size of this pilot program, this is and will be the only legally prescribed channel under which global hedge fund managers can enter the Chinese hedge fund market,” said Boss & Young partner Hubert Tse.

Change in economy of China

The Chinese government has indicated in the past that it will move slowly away from having a command economy, but it also wants to encourage long-term investment to guard against a future crisis caused by rapid inflows or outflows of cash—both can damage an economy if the change is too rapid, though the first is less intuitive—and the low ceiling of investment reflects that position while giving a few wealthy Chinese investors another solid option.

Hedge funds, unsurprisingly, are always looking for new sources of capital (and there is plenty in capital) even with the economy slowing and debt concerns rising. There’s no question that Chinese investors are looking for more opportunities. The country’s wealthiest man, Wang Jianlin, bought a company listed on the Hong Kong stock exchange so that people outside China could vicariously invest in his firm, showing how eager he was to get around the barriers between him and global markets.

The six firms that have been approved for the first stage of the program are Canyon Partners, Citadel, Man Group, Oaktree Capital Group LLC (NYSE:OAK), Och-Ziff Capital Management Group LLC (NYSE:OZM), and Winton Cap.