A woman stands next to an advertisement for yuan bonds in Hong Kong. The initial investment quota for RQFII will be set at 20 billion yuan ($3.1 billion). Jerome Favre / Bloomberg

The imminent implementation of the long-awaited yuan qualified foreign institutional investor (RQFII) program will give a boost to yuan-denominated financial products and further enhance Hong Kong's role as an offshore yuan center, local fund managers and finance academics said.

Vice-Premier Li Keqiang announced on August 17 that the initial investment quota for RQFII - which allows qualified securities houses in town to invest in mainland securities - will be set at 20 billion yuan ($3.1 billion). It's higher than the originally anticipated $1.5 billion.

On August 22, Shenzhen Daily cited Julia Leung, Hong Kong under secretary for financial services and the treasury, on its website saying that the RQFII program could be launched by the end of 2011.

"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," Simon Luk, director at Capital Focus Asset Management, told China Daily.

"The appreciation prospect of the currency should offset the disadvantage of stock market volatility on the mainland," Luk said, adding the market responses toward yuan-denominated financial products should be positive.

According to Luk, the development of mainland securities-based financial products is just the first step. "If the market response is favorable, we will see more yuan structured and derivative-based financial products in the market," Luk said.

The mainland authorities launched QFII in 2003, allowing qualified foreign institutional investors to invest in mainland stock and bond markets. A research report released by DBS Group estimated that the QFII program so far has attracted $20 billion of capital into the mainland asset market.

The RQFII will allow Hong Kong brokerage firms and fund companies to do the same under separate quotas. The difference is that only local institutional investors are permitted to use the quota to invest yuan raised through the local capital market in mainland stocks and bonds.

Though Hong Kong's yuan deposits and cross-border trade settlements have grown tremendously, the development of offshore yuan business is still slow as the repatriation pace of the currency is still regarded insufficient.

Given the green light, RQFII is expected to quicken flowback of yuan for a more attractive return on the mainland.

"The RQFII is widely anticipated to spur the yuan repatriation process. That is conductive to the development of Hong Kong as an offshore yuan financial center," said Billy Mak, a professor in the Department of Finance and Decision Sciences of Hong Kong Baptist University.

"It can make the yuan repatriation process in the city more active and sound."

According to Mak, the launch of the RQFII, together with the permission to list local exchange-traded funds on mainland bourses and allowing local enterprises to invest yuan as foreign direct investment on the mainland, can strengthen the repatriation mechanism.

"This is vital to expand more offshore yuan business in Hong Kong when it can be brought back to the mainland as the yuan investment channels have expanded", Mak told China Daily.

Vice-Premier Li also said during his three-day visit 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 (MoF) was three times oversubscribed, reflecting the buoyant investor sentiment toward yuan investment as it is widely expected to continue appreciating. This was the third time the MoF issued yuan-denominated bonds in the city.

oswald@chinadailyhk.com

China Daily

(HK Edition 09/07/2011 page2)