Analysts said that the imminent RMB Qualified Foreign Institutional Investors (RQFII) trials will be conducive to expanding the investment channels of yuan funds raised in Hong Kong.

This will also enhance Hong Kong's role as an offshore RMB center and accelerating yuan's internationalization process.

The People's Bank of China (PBOC), the country's central bank, will kick-start RQFII trials soon, allowing yuan funds raised in Hong Kong to be invested in the mainland's securities market, a senior official said Thursday.

The official, who spoke anonymously, said that the initial investment quota allowed to RQFII will be less than 20 billion yuan ($3.13 billion), 80 percent of which will be invested in the mainland's stock market.

The option will first be open to domestic fund managers familiar with the A-share market and subsidiaries of securities companies in Hong Kong.

The RQFII program, one of the measures announced by Vice Premier Li Keqiang during his visit to Hong Kong last month, seeks to allow foreign investors to use offshore yuan to buy mainland securities.

Expand investment channels

Despite the relatively conservative 20-billion yuan quota, the RQFII trail program was an encouraging start as it will help expand the investment channels for yuan funds raised in Hong Kong.

Analysts estimate that the RMB deposit in Hong Kong is likely to reach one trillion yuan by the end of the year.

At present, however, 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.

"By allowing offshore yuan fund to invest in mainland securities, it will accelerate more local financial institutions to bundle the yuan fund to develop more yuan-denominated financial products in the city," said Simon Luk, director at Capital Focus Asset Management.

Luk added that the market responses toward yuan-denominated financial products should be positive.

"If the market response is favorable, we will see more yuan structured and derivative-based financial products in the market," Luk said.

Enhance Hong Kong’s Role as Offshore Centre

The RQFII program is part of the central government's measures to build Hong Kong into an offshore RMB center, said Vice Premier Li Keqiang at a forum on the nation's 12th Five-Year Plan (2011-2015) and cooperation between the mainland and Hong Kong.

The vice premier said Hong Kong enjoys a natural advantage in developing the offshore RMB business and the central government will support the innovation and development of offshore RMB financial products in the city.

Li also said that more yuan bond issuance will be encouraged to bolster the offshore yuan business in Hong Kong.

The recent 20 billion yuan bond issuance by the Ministry of Finance was three times oversubscribed, reflecting the buoyant investor sentiment toward yuan investment. This was the third time the Ministry of Finance issued yuan-denominated bonds in Hong Kong.

Fang Zhou, assistant chief research officer at the Hong Kong-based One Country Two Systems Research Institute, said that the lack of effective RMB flow-back mechanism and the low yield are always getting in the way in developing Hong Kong into an offshore RMB center.

However, Fang said, the new measures brought by the central government this time, including the RQFII program and the expansion of the issuance of bonds, will “undoubtedly advance the development of Hong Kong's offshore RMB market".

His view was echoed by Billy Mak, a professor in the Department of Finance and Decision Sciences of Hong Kong Baptist University.

Mak believed that the RQFII is expected to accelerate the flow-back of yuan, which is conductive to the development of Hong Kong as an offshore RMB financial center.

Accelerate Yuan’s Internationalization Process

Analysts believed that the central government's efforts to build Hong Kong into an offshore RMB business center will push forward the yuan's internationalization process.

An offshore RMB center is very important in promoting the internationalization of the yuan, as it is a market for transactions, deposits and innovations, said Yang Tao, an expert with the Chinese Academy of Social Sciences.

And the 20 billion yuan issuance of yuan-denominated treasury bonds in Hong Kong was seen as another step down the road toward yuan's internationalization.

"With more RMB bond issuances, there will be wider secondary trading and related activities. A deeper and more liquid RMB bond market would lead to more bond funds and other RMB products," said Alexa Lam, the acting CEO of Hong Kong's Securities and Futures Commission.

Lam added that this would in turn create a deeper pool of RMB assets essential for achieving the goal of further liberalization of the RMB.

Besides, the Chinese government is promoting cross-border trade settlement in yuan as a means to internationalize yuan.

Demands for trade settlement in yuan are huge in Hong Kong, said Chen Wen, deputy manager of the business optimization department of the Bank of China (Hong Kong), adding that the volume of yuan settlement in Hong Kong has totaled 1.8 trillion yuan since 2009.

China's Ministry of Commerce said late last month that it would try to formally give green light to foreign direct investment in RMB in September.

If implemented, the rules will expand channels for overseas-acquired RMB funds to flow back into the country, accelerate the issuance of yuan-denominated bonds and other forms of yuan financing in Hong Kong, and give a push to the RMB's internationalization drive, Chen said.