China to expand investment options for yuan holders

By Charlie Zhu and Michelle Chen

HONG KONG (Reuters) - China will soon allow foreign investors to use the yuan to buy up to 20 billion yuan ($3.1 billion) worth of mainland securities, Chinese Vice-Premier Li Keqiang said on Wednesday, one of a string of moves aimed at boosting the currency's international role.

Speaking in Hong Kong, where he was joined by central bank governor Zhou Xiaochuan and other officials for the launch of China's biggest-ever offshore yuan bond, Li also announced plans to further expand yuan bond sales in the territory and to bolster its position as the only offshore yuan trading center.

Li, who is widely expected to succeed Wen Jiabao as premier in 2013, offered a series of steps aimed at fostering ties between China and the former British colony, including allowing mainland firms to sell bonds in the territory, a plan that could vastly expand the offshore yuan market.

"Hong Kong enjoys a natural advantage in the development of the offshore renminbi business," Li said.

Li did not say when the long-awaited scheme that allows foreign investors to buy Chinese securities would be launched, but analysts herald the move as another step toward raising the yuan's global profile.

Also known as the RQFII, the scheme allows foreign owners of yuan to use the currency to purchase yuan-denominated stocks and bonds on the mainland, giving them a chance to dabble in the fast-growing financial markets of the world's No. 2 economy.

Currently, investors in the offshore yuan market in Hong Kong can only plough their holdings into yuan deposits or yuan-denominated bonds that yield unattractive returns of between 0.4-3 percent.

While many foreign investors hold the yuan on the assumption that it is set to appreciate further, slim returns are a sore point nonetheless, especially when a similar yuan investment on mainland China can earn up to 3 percentage points more.

"With more investment options available, firms and depositors in Hong Kong will use and hold yuan more willingly in the future, which is a positive move," said Chen Yong, an analyst at Huatai United Securities in Shanghai.

PROMOTING YUAN

At the heart of Beijing's push to raise the yuan's international profile is a desire to have a currency that matches its growing clout, and the hope of cutting China's reliance on the dollar.

To that end, China wants firms to not just rely on the U.S. currency when settling trade.

China's experiment with using Hong Kong as a place outside the mainland where the yuan can trade, and as a test bed where capital controls can be gradually eased, has met with great success.

Yuan deposits in Hong Kong have surged over seven times to more than half a trillion yuan in less than two years, making it more pressing for banks -- and Beijing -- to give foreign owners of the yuan more attractive investment options.

Li said Beijing would support the growth of the yuan market in Hong Kong, expand yuan circulation channels between Hong Kong and the mainland, and support the development of offshore yuan financial products in Hong Kong.

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

"We will gradually increase the size of insurance and work for the development and improvement of the renminbi bond market in Hong Kong," he said.

Li's remarks came as China sold its biggest yuan-denominated debt deal ever in Hong Kong on Wednesday in a deal worth 20 billion yuan ($3.1 billion), adding depth to a market that reflects its ambitions to spread the use of its currency abroad.

Below is a list of plans outlined by Li:

-- China to launch RMB QFII which would allow foreign investors to invest in mainland securities with initial quota size of 20 billion yuan

-- China to promote Hong Kong as offshore yuan trading center

-- China to further open up services sector to Hong Kong

-- China to expand yuan trade settlement scheme nationwide

-- China to allow Hong Kong firms to directly invest in mainland China using the yuan

-- China to expand Treasury bond sales in Hong Kong

-- China to launch in ETF linked to Hong Kong stocks in mainland China

-- China to let Hong Kong insurers set up branches in mainland China, take stakes in mainland insurance firms

-- China to study possibility of letting Hong Kong participate in China's existing free trade agreements

-- China's flagship West-East gas pipeline to start supplying gas to Hong Kong in 2012

$1 = 6.383 Chinese Yuan

(Additional reporting by Saikat Chatterjee; Writing by Koh Gui Qing; Editing by Chris Lewis and Ken Wills)