Door opens to yuan investments

Chinese Vice Premier Li Keqiang (L) addresses an economic forum in Hong Kong August 17, 2011. [Edmond Tang/chinadaily.com.cn]

HONG KONG / BEIJING - The central government will soon allow investors in Hong Kong to use the yuan to invest in the mainland's equities market, Vice-Premier Li Keqiang said on Wednesday.

The announcement is one of a series of fresh measures to boost the yuan's international profile and Hong Kong's role as a major center for the offshore yuan business.

Qualified foreign institutional investors will be allowed to buy yuan-denominated securities in the mainland market under the so-called RQFII scheme with an initial quota of 20 billion yuan ($3.1 billion), Li announced at a forum in Hong Kong.

"The move is aimed at reducing the impact of speculative capital on the mainland's financial market and to allow it to enter the market through legal channels," said Li Xunlei, chief economist at Guotai Jun'an Securities.

Analysts estimate that the yuan deposit is likely to reach 1 trillion yuan by the end of the year, but they said the RQFII program will only have limited impact in terms of pushing the A-share market higher, given its relatively small scale.

At present, investors in Hong Kong have very limited options to invest in the mainland securities market, such as buying yuan-denominated bonds. The RQFII program will help broaden the channels for yuan in the offshore market to flow back to the mainland, analysts said.

In the meantime, the central government also vowed to boost the offshore yuan market, expand the pilot program for trade settlement in the yuan from Hong Kong to nationwide, and support the development of yuan-denominated financial products in Hong Kong.

The Ministry of Finance will issue government bonds of 20 billion yuan in Hong Kong and bonds worth 5 billion yuan will be sold to individual investors, according to Li.

"Issuing renminbi treasury bonds in Hong Kong will be a long-term institutional arrangement of the central government," Li said.

"The default risk of the Chinese government bonds is very low and the yuan is expected to further strengthen against the dollar, so we think the bond sales will be welcomed by the local investors," said Zhang Ying, a researcher at Bank of China (Hong Kong) Ltd.

The yuan market has seen explosive growth since Hong Kong established itself as an offshore yuan settlement center in 2004. Yuan deposits in Hong Kong reached 553.6 billion as of June 2011, according to the Hong Kong Monetary Authority. Analysts expected that figure to reach 2 trillion yuan in 2012.

During his visit to Hong Kong, Li also announced that the mainland will soon allow exchange-traded funds based on Hong Kong-listed stocks to be traded in the mainland's stock exchanges.

Hong Kong firms will also be allowed to use the yuan to directly invest in the Chinese mainland and Hong Kong insurance companies will be encouraged to set up branches in the mainland and to own stakes in mainland insurers.