(Reuters) - Hong Kong will scrap the daily 20,000 yuan ($3,264) conversion limit for residents from Monday when a landmark scheme to link the city's stock market with Shanghai is launched, facilitating investment flows into China's stock market.

Regulators said this week the cross-border share trading scheme would start on Monday, a crucial step in China's efforts to open its capital markets and to allow Hong Kong residents to choose from a wider menu of yuan-denominated assets apart from bonds.

"The removal of the daily conversion limit will facilitate Hong Kong residents' participation in the Shanghai-Hong Kong stock connect as well as other investments and transactions denominated in the yuan," Norman Chan, chief executive of the Hong Kong Monetary Authority, told reporters.

Chan said the 80,000 daily yuan remittance quota across borders for Hong Kong residents remains due to mainland regulations while the foreign currency conversion to yuan will take place at offshore market rates.

While Hong Kong has allowed non-residents to convert unlimited daily quantities of yuan since 2012, it has capped the conversion limits for residents at 20,000 yuan since 2004, because it wanted to prevent rampant currency speculation.

A yuan cash shortage in Hong Kong may be exacerbated in the initial days of the stock-connect launch due to high demand for relatively undervalued Shanghai-listed shares, analysts say.

However, Chan added that the removal of yuan conversion limits on the offshore yuan liquidity pool will be limited given the yuan pool in Hong Kong has grown to 1.1 trillion yuan and daily foreign exchange transactions have increased.

The yuan funds for non-resident conversion would draw primarily from Hong Kong's more than 9.8 trillion Hong Kong dollars ($1.26 trillion) pool of deposits, of which more than half are foreign currency deposits including 945 billion yuan, according to September-end data from the central bank.

Seeking to promote global use of the yuan, China has in the past two years appointed clearing banks for Taiwan, Singapore, London, Frankfurt, Paris, Luxembourg and Seoul. Kong Kong and Macau had clearing banks earlier; Sydney is expected to join the list under a deal to be signed later this month.

The renminbi is also gaining traction among financial institutions and global companies. The yuan was the seventh-ranked global payments currency in August 2014 rising from 13th place in January 2013, according to SWIFT, a global provider.