China's securities regulator will begin a trial programme that allows local fund houses to raise money offshore for investment in the domestic financial market, two sources said on Monday.

The programme, known locally as mini-QFII, will let Chinese fund managers compete with western players such as Franklin Templeton and Invesco .

At least 80 percent of the money raised will have to be invested in the domestic bond market, said the two sources who are familiar with the matter but who are not authorized to publicly disclose the details.

Most analysts last year were expecting an initial cap of 20 billion yuan ($3 billion) on how much can be transferred into China under the scheme.

Here are some questions and answers on the proposed scheme, called mini-QFII because it is modeled after the older qualified foreign institutional investor (QFII) program.

WHAT IS MINI-QFII?

Mini-QFII takes after the 8-year-old QFII programme, which allows foreign fund managers to invest in Chinese stocks and bonds on behalf of foreign investors using money raised overseas.

Up to June last year, some 89 foreign firms including Goldman Sachs , JPMorgan and smaller players such as Singapore's DBS were approved to invest in China under the QFII programme, pumping in about $17.7 billion.

The mini-QFII scheme will allow Chinese brokerages and fund companies to do the same under separate quotas. Most analysts had expected the overall program to be initially capped at 20 billion yuan, with 80 percent for bonds and the remainder for stocks.

Under the current system, Chinese investment firms are only allowed to raise money domestically to invest in financial markets.

WHY IS CHINA INTRODUCING MINI-QFII?

China has been trying to promote the use of its yuan currency outside its borders in recent years, with the eventual long-term goal of displacing or at least standing alongside the U.S. dollar as the world's reserve currency.

With the establishment of Hong Kong as an offshore yuan centre, there is now added pressure to open up new ways to use the currency beyond the current options.

The mini-QFII scheme would give investors one such option, allowing them to invest directly in China's domestic financial markets. In so doing, it would help to raise the attractiveness of the currency to Hong Kong-based investors.

WHO WILL BENEFIT FROM MINI-QFII?

Chinese brokerages who are allowed into the scheme will be the clear winners, while investors who already have yuan deposits sitting in banks collecting low interest rates could also benefit if the mini-QFII funds are well managed.

Chinese brokerages with international arms, such as Guotai Junan , Huatai Securities , GF Securities and Guoyuan Securities are likely to be among the first group allowed to participate in the scheme.

Domestic-focused Chinese fund houses such as Nanfang, Huaxia and Haitong are also likely to attract fresh inflows of cash upon approval of the scheme.

Overseas investors with a higher risk appetite will also have a new investment option as they can choose to put their money with domestic fund houses in addition to foreign ones.

HOW WILL MINI-QFII AFFECT CHINESE EQUITIES?

The new programme will likely help sentiment on China's domestic financial markets, but the relatively small size of the money involved means it is unlikely to have an immediate material impact.

Volatile Chinese markets, the relatively speculative nature of mainland funds, underscored by higher portfolio turnover levels, and a lack of track records overseas are some of the roadblocks for the success of the scheme.

China's stock markets are largely dominated by retail investors due to strict limits placed on domestic and foreign institutional investors, making them more prone to sharp swings.

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