Foreign hedge funds thrive in China despite strict rules

Shanghai

HUNDREDS of foreign hedge funds and traders are working in a regulatory grey area in China, using speculative trading strategies that are complicating regula-tors' efforts to calm the country's turbulent stock markets.

Interviews with more than a dozen foreign hedge funds, proprietary traders and consultants reveal foreigners are active on a large scale in Chinese stocks, despite tight investment rules designed to limit their activities.

Foreign hedge funds have found legal ways to bet on Chinese stocks and derivatives without going through formal investment channels, which prevent them using strategies such as short selling, blamed by some authorities for the selloff.

"With current market volatility and weak retail investor sentiment, these hedge fund strategies would naturally lead them to sell the market . . . which is against the government's intention of propping up the market," said Oliver Barron, China market analyst at investment bank…