Pilot program to allow HK investors to buy mainland stocks using RMB

BEIJING / SHANGHAI - The mainland on Friday launched a pilot program that will allow overseas investors to use offshore yuan deposits to invest in the mainland's capital markets.

Calling it a landmark move, experts said the deregulation will increase the popularity of the currency and expedite its internationalization.

The initial quota of the program, known as the RMB Qualified Foreign Institutional Investor, is 20 billion yuan ($3.1 billion), according to the China Securities Regulatory Commission.

Some securities firms and fund companies that have subsidiaries in Hong Kong are expected to take part in its trial run.

According to the regulator, 80 percent of the quota will be allowed to invest in the mainland's fixed-income markets such as government and corporate bonds while only 20 percent will be allowed to enter the stock markets.

The launch of the program comes as the mainland is experiencing emerging pressure of capital outflows and mainland banks have seen a decline in their yuan positions for foreign exchange purchases.

The mainland's stock markets have also been burdened by the growing liquidity pressure, with the benchmark Shanghai Composite Index declining by more than 20 percent this year, making it one of the worst performers among major global markets.

"The program will attract more offshore yuan to flow back to mainland markets, which could help ease the mainland's liquidity pressure and offset the recent outflows of US dollars," said Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology.

Dong said introducing more mature institutional investors to the capital markets will help improve the investor structure of the mainland's stock markets, which are dominated by retail investors.

"The participation of more institutional investors will help stabilize the market in the long run and curb speculation that usually leads to sharp fluctuations," he said.

Analysts said that the launch of the program will help boost weak market confidence and shore up A-share market liquidity in the short run, but it can hardly be a market savior given the limited size of the initial capital pool.

The mainland's stock market rallied toward closing on Friday with the Shanghai index rising 2.01 percent, or 43.94 points to close at 2224.84 points.

"The program won't have substantial impact until the regulator gradually expands the current quota, which is too little to have any influence on the market," said Wang Jianhui, chief economist with Southwest Securities Co Ltd.

But Wang said that the start of the program will benefit the fast-growing offshore yuan market in Hong Kong and help push forward the internationalization of the yuan.

Analysts in Hong Kong expect that the scale of the program may grow to between 50 billion yuan and 100 billion yuan in the next two years.

Guo Shuqing, chairman of the China Securities Regulatory Commission, said recently that the regulator will encourage more investments from Hong Kong and Macao to the mainland's capital markets, especially investments on the exchange-traded funds.

The central government in recent years has stepped up efforts to create more investment channels for the offshore yuan. It is part of Beijing's ambition to raise the global profile of the yuan to reduce reliance on the US dollar in cross-border transactions.

The government is also keen on developing Hong Kong into a key center for the offshore yuan. Vice-Premier Li Keqiang in August promised a basket of measures to boost the offshore yuan market in Hong Kong.

Some analysts expect that yuan deposits in Hong Kong could reach 2 trillion yuan by 2014.