China has decided in principle to allow foreign hedge funds to raise capital in the Chinese mainland, a move that could open opportunities for the capital-strained Asian hedge funds industry, the South China Morning Post reported Wednesday.

There will remain major restriction on what foreign hedge funds can do in China. According to the report, all will have to register in Shanghai and can invest only in markets outside the mainland.

The Shanghai Municipal Office of Finance Service has received guidelines from China's security and foreign exchange regulators that will allow foreign money managers to set up yuan-denominated hedge funds, the report said.

Overseas money managers have long eyed the mainland's capital ever since 2008 as raising funds becomes more difficult for western investors.

TPG announced early this February that it had locked some 4 billion yuan of committed money, while Blackstone, Carlyle Group and investment banks including Goldman Sachs and Morgan Stanley have initiated plans to launch yuan-denominated hedge funds.

China already allows foreign firms to set up private equity funds in the country. Unlike hedge funds,those funds must invest exclusively in mainland China.