Hedge funds, CME looking in wary China for growth

By Kirby Chien

BEIJING, June 12 (Reuters) - The world's largest hedge funds and the Chicago Mercantile Exchange CME.N need to convince a "cautious" China of the benefits of their products, the groups said on a trip to the country, even as U.S. regulators look to rein them in.

"We have much work to do in making people comfortable about our value," Richard Baker, the former U.S. congressman and now chief of Managed Funds Association, a hedge fund industry lobbying group, told reporters on Thursday.

"There is a cautious desire to understand what we do," said Baker, referring to a conversation he had with Chinese officials including Gao Xiqing, the general manager of China Investment Corp (CIC), a sovereign wealth fund set up last year to manage $200 billion in reserves.

MFA and CME, the world's largest futures exchange, led a group that included eight of the world's largest hedge funds to the northern port city of Tianjin to co-host a conference along with local and central government agencies.

The State Administration of Foreign Exchange, an arm of China's central bank, which is trying to diversify China's $1.76 trillion in foreign exchange reserves, also attended the conference.

But China is very cautious about complicated financial products, and is still debating the benefits of plain vanilla stock index futures, fearing they could introduce more volatility into an already unpredictable market.

China's main stock index .SSEC sank on Thursday to a new 14-month closing low, and has dropped 11 percent in the past three days and 52 percent from last October's record peak.

"The hedge fund community also recognises this is a place they want to be a part of as its financial markets continue to grow and evolve," said Tina Lemieux, CME's managing director of hedge funds and broker services.

The comments come as the U.S. Commodity Futures Trading Commission announced earlier this month steps to boost its market oversight powers amid criticism that investment funds have increased grain and energy prices and boosted volatility.

U.S. officials are formulating a plan to upgrade financial market regulation amid a deepening credit crisis that has rocked global markets and prompted banks to write off billions.

MFA's Baker has said he would fight any effort to impose new regulations on the $2 trillion industry.

Baker and Lemieux said they needed to educate Chinese authorities on the hedge fund community and change its negative perception by regulators and some investors.

The CME merged last year with the Chicago Board of Trade, and earlier this year announced plans to buy the energy exchange NYMEX NMX.N, which would give it a market share of about 98 percent of U.S. futures trading and clearing. ($=6.91 yuan) (Editing by Michael Urquhart)