Its nice to be American

Zan Dapcevic
The University of Auckland
29
th
April 2014


Addressing the prompt: Identify the case that a US MNE (or a group thereof)
gained preferential access to a foreign direct investment opportunity in a host
nation by virtue of its nationality, rather than its competitive virtues.

Introduction

This essay examines the economic relationship between United States
(US) and People's Republic of China (PRC). Furthermore it examines how
Hedge Fund cartel from US has preferential market access to foreign direct
investment (FDI) opportunities in the PRC. This theory is supported by the
recent case of Qualified Domestic Limited Partner (QDLP) pilot programme
run by Shanghai Finance office regulator that approved six hedge funds from
US to begin raising capital on the mainland from wealthy individuals and
pension funds, consequently gaining first-mover advantage on the market.

Strong trade relationships since 1972

The US and the PRC resumed trade in 1972 after President Richard
Nixon visited Chairman Mao Zedong and Premier Zhou Enlai in Beijing.
Despite Nixons primarily goal to strengthen negotiation position for North
Vietnam and Mao Zedongs concerns over growing Soviet military as
potential threat to China, visit has resumed as the beginning of strong
economic relations (Hormats, 2012). Since then US multinational corporations
(MNCs) have entered into more than 20,000 joint-venture agreements in the
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PRC. Looking backwards, total amount of FDI made by US companies is
today valued at more than $48 billion. Investments have been primarily made
by US MNCs to establish production sites for their products by leveraging on
cheap domestic labour force and in return to be more competitive on their
home markets of sales. This resulted in enormous exports by the PRC into the
US creating the largest bilateral trade deficit for the US valued at $266 billion
in 2008. In return the PRCs surplus has evidently been invested in foreign
reserves, today valued at more than $2 trillion of which more than 82% is
invested in dollar-dominated assets, such as US Treasury Securities (The USC
US-China Institute, 2009).
To further tighten economic relationships President George W. Bush
and President Hu Jintao in 2006 initiated a framework China US Strategic
Economic Dialogue (SED), a sort of G2 summit, where both sides top leaders
meet at least twice a year for discussion. Since its establishment US Treasury
Secretary Mr Timothy F. Geithner (Mr Henry M. Paulson until 2008) is a
leading representative of US. Throughout SED a memorandum of
understanding was singed in April 2008, allowing Chinese qualified
institutional investors to invest in US stocks for the first time under a pilot
Qualified Domestic Institutional Investor (QDII) Programme Pilot. Foreign
Institutional Investor Programme that allowed US institutional investors to in
Chinese stocks followed it in the same year (U.S. Treasury Department Office
of Public Affairs, 2008).

Hedge funds highly profitable business

Hedge Funds are known as funds that constitute an investment
strategy whereby portfolio managers or partners are looking for opportunities
that give absolute returns, while protecting the principal from potential
financial loss. The first hedge fund was indeed hedged fund. (Ineichen,
2012). Looking at hedge funds as a business, it is has a highly profitable
business model where company firstly earns revenue by transaction fees and
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secondly shares a profit of investment made by a principle investor. Such
profit share usually amounts of 20%. Globally, hedge fund industry is today
worth more than $2 trillion dollars and their clients are usually governments
through their pension funds, corporates, banks and wealthy individuals. In
comparison, foreign private equity firms that have been presented in the PRC
for years, hedge funds typically invest in tradable securities. Investments in
companies are hold professionally, meaning that hedge funds do not direct
day-to-day business of companies that they own. Both investor types have
proven to be a valuable contributor to outward US FDI over last 10 years with
2007s peek at $288 billion globally (KITE Invest, 2013). There is no clear
evidence that hedge funds are having preferential market access for FDI
opportunities for their investments due to their nationality.

Hedge Funds interests in the PRC FDIs

As evaluated above we usually think of FDI made by hedge funds in
terms of their investment decision. This essay, however evaluates hedge
funds business model and its preferential market access to FDI opportunities
in terms of their business expansion. Hedge funds are fans of markets with
high net worth individuals. According to recent Bain & Co. reports there are
more than 168 billionaires living in the PRC holding $3.6 trillion of capital
ready to invest abroad, while having limited options of alternative domestic
investments such as shaking real estate market (Hedge funds given QDLP
quotas: paper, 2013). Furthermore, Beijing government is facing a pension
funding gap valued at $3.1 trillion, which gives hedge funds motivation to
lobby domestic governments for international policy deregulation (Kelleher,
2013). Since 2007 US hedge funds expenditure over lobbying the government
averaged at around $7 million per year on various issues (Center for
Responsive Politics, 2012). This has also resulted in actions being taken by US
Treasury Department to negotiate deregulation with the PRC and allow US
Hedge Funds to enter the market.
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Shanghais Qualified Domestic Limited Partner Programme

In June 2012 it was reported by Shanghai Finance Office that foreign
hedge funds would be allowed to raise capital from mainlined China
investors and then invest abroad. Due to the attractiveness of the market,
more than 100 hedge funds submitted the application for license that allowed
wholly owned subsidiary to be operating in the PRC for the first time
(Rabinovitch, 2012). City officials have reported three main requirements for
hedge funds to be met originating from QDII schemes: (i) a minimum of five
years of investment management experience; (ii) asset under management of
minimum $10 billion; and (iii) regulated in a country which has signed a
memorandum of understanding with China Securities Regulatory
Commission (Robinson & Newman, 2008).
In September 2013, first six hedge funds Canyon Partners, Citadel,
Man Group, Oaktree, Och-Ziff and Winton Capital have been selected by
Shanghai officials for participation in Qualified Domestic Limited Partner
(QDLP) Programme with the approval to raise money in RMB from mainland
investors with a quota of $50 million per hedge fund (Davies & Rabinovitch,
2013). In addition, hedge funds will be operating in Shanghai free-trade zone
giving them numerous tax incentives compared to their local competitors
(Kelleher, 2013). All six funds are today global companies, but have either
headquarters or large office base in the US. Some of them are even among
those on the list, who are financing lobbying to the US government regarding
hedge fund legislation and international (de)regulation.
Consequently, hedge funds operating outside US were illegible to
submit an application, as their countries did not have a singed memorandum
of understanding with the PRC government. For example, European
Securities and Market Authority (ESMA), has just recently - March 2014
been able to sign a cooperation agreement with Chinese authorities to enable
European hedge funds to participate in QDLP programme sometime in the
next five years (COOConnect, 2014). Another example is UK, which signed a
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QDII agreement back in 2007, but so far hedge funds have not been allowed
to enter the market. No progress has been made by France either, who may
only allow Chinese commercial banks to access funds overseen by their local
authority - Autorite des Marches Financiers (AMF) (Keidan, 2014). Today
however, PRC has memorandums of understanding singed with around 30
nations, including Switzerland, Russia, and New Zealand, but with no
investment allowances for foreign investments funds to raise capital in the
PRC (China Securities Regulatory Commission, 2009).
There are events confirming that American hedge funds have lobbied
the US government and Shanghai officials to gain access to the PRC mainland
investors before others, giving them competitive first-mover advantage on the
market. Moreover, it is of great importance for US government to negotiate
enable outward FDI for domestic financial institutions as their share
contributes of more than $37 billion approximately 10% towards US total
outward FDI per year (Kornecki, 2013). By these events, US has again proven
to continue its hegemony in the World by monopolising financial industry
and influencing foreign governments for policy changes in order for US
financial institution gain access and consequently control over the capital
outside US.

Conclusion

As for now, it can be concluded that six US hedge funds has jointly
gained preferential FDI opportunity to set up their operations in the PRC
market due to their US nationality rather then their competitiveness. With this
access they have possessed the first-mover advantage in introducing global
securities to the PRC mainland investors for the first time as foreign
institutions. In addition, they obtained tax incentives by local authorities
operating in the free-trade zone area.
This paper examines US China economic relationship and identifies
key events in the post-financial crisis time, when US government has
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influenced the PRC authorities to deregulate their financial policies solely to
favour private US financial institutions hedge funds to enter the market
offering their financial products.
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