Hong Kong Advisers Propose Yuan-Investment Program for Qianhai

Nov. 19 (Bloomberg) -- China should let financial institutions in Shenzhen’s Qianhai special zone invest yuan overseas, boosting Hong Kong’s holdings of the Chinese currency, a Hong Kong government-advisory body proposed.

The Financial Services Development Council suggested China sanction a quota of 50 billion yuan ($8.2 billion) and $5 billion for Qianhai under the Qualified Domestic Institutional Investor program.

“Most financial institutions which engage in the renminbi business in Hong Kong consider the lack and instability of renminbi liquidity the biggest bottleneck of the offshore renminbi market,” the council said in a research paper published yesterday.

The extended program, or QDII3, must abolish and simplify approval procedures for individual investment products, and quotas should be allocated transparently, the council said.

The People’s Bank of China identified QDII2, which will allow individuals to invest in overseas capital markets, as among its major goals for 2013. The central bank has approved a plan for trials in Guangzhou and Shenzhen, Shanghai Securities News reported in June, citing Wang Jingwu, head of the central bank’s Guangzhou branch. There haven’t been any public statements on QDII3.

China chose the Qianhai district of Shenzhen, a city that borders Hong Kong, as a testing ground for freer use of the yuan. Deposits in the Chinese currency in Hong Kong rose 21 percent this year to a record 730 billion yuan in September, after climbing 2.5 percent in 2012, Hong Kong Monetary Authority data showed.

Key Reforms

A Communist Party meeting that ended last week decided to accelerate convertibility of the yuan and the freeing-up of interest rates. It decided also to improve treasury yield curves and let qualified private investors set up small- to medium-sized banks.

The Hong Kong council proposed allowing offshore banks to participate in China’s domestic repurchase market and to be permitted to remit the yuan borrowed offshore. Hong Kong lenders must be able to sell “sizable” certificates of deposit and yuan bonds in the onshore interbank market, it said.

Companies from emerging markets such as Brazil, India and Russia can be encouraged to sell yuan securities, known as Dim Sum bonds, in Hong Kong, the council said.

Hong Kong Chief Executive Leung Chun-ying welcomed the FSDC report, saying it provides concrete proposals for facilitating diversification of the financial services industry and enhancing the city’s position and functions as an international financial center.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net