China pushed for greater international use of the yuan on Wednesday by promising to let foreign investors buy mainland shares and bonds, pushing up shares of brokerage stocks listed in Hong Kong.
The plans, among a string of others unveiled by China Vice Premier Li Keqiang, underscored Beijing's intent to propel explosive growth in the Hong Kong offshore yuan market and turn the yuan, or renminbi, into a widely-traded currency one day.
In a sign of Beijing's patent currency ambitions, it also concluded the biggest-ever offshore yuan bond deal on Wednesday in Hong Kong, which Li made clear would remain the paramount center for cultivating a yuan market outside China.
"Hong Kong can make good use of the opportunities in the yuan's growing importance...to further enhance its status as an international financial center," Li said at a launch of the record-sized yuan bond that was attended by other Chinese officials including Central Bank Governor Zhou Xiaochuan.
Li's speech, with its specific policy announcements, along with other recent substantive speeches from him appeared to signal that China's top leaders are preparing him for a larger role ahead of his widely expected promotion to premier in 2013.
Li said foreign owners of yuan can soon buy up to 20 billion yuan ($3.1 billion) worth of yuan-denominated stocks and bonds on the mainland with the renminbi. He did not give an exact launch date for the scheme.
The news sparked a rally in Hong Kong-listed shares of brokerage stocks. First Shanghai (0227.HK) soared 22 percent and Shenyin Wanguo (0218.HK) surged 21 percent.
By letting more yuan flow between China and Hong Kong, analysts said China gets room to experiment with a gradual easing in capital controls that may be shaken off in a big way overtime if Beijing chooses to free the yuan.
For investors in the Hong Kong offshore yuan market who can only funnel their yuan into yuan deposits or yuan-denominated bonds for vapid returns of between 0.4-3 percent, analysts say the scheme, also known as "R QFII," gives respite.
"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.
While many foreign investors hold the yuan on the assumption it is set to rise, slim returns are a sore point nonetheless, especially since similar yuan investment on mainland China can earn up to 3 percentage points more.
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.
"Not only is Beijing still comfortable with the rapid pace of offshore yuan market development, it is taking the yuan internationalization process to the next stage," HSBC said.
"By opening up a significant channel for yuan inflows back to onshore asset markets, (it is) closing the circle for the global circulation of China's currency," the bank said.
Indeed, Li made clear that China is ready to provide Hong Kong with more investment avenues for its yuan deposits.
He said mainland companies are now allowed to sell bonds in the territory, a shift from before when only financial companies could issue bonds in Hong Kong.
To anchor the yuan bond market, Li said Beijing is committed to selling Treasury bonds 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 20 billion yuan ($3.1 billion) of bonds in its biggest-ever issue, adding depth to a fast-growing market.
"It's all very positive," Bonn Liu, a partner-in-charge at KPMG China Capital Markets, said of Li's announcements. "It's a step out for the yuan."
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; Donny Kwok and Alison Leung; Writing by Koh Gui Qing; Editing by Chris Lewis and Ken Wills)