DECEMBER 16, 2011, 10:00 A.M. ET
Article from the Wall Street Journal
By SHEN HONG And YUE LI
SHANGHAI—China has launched a trial program to allow yuan funds raised offshore to be invested in its domestic capital markets, in a widely anticipated and significant move to help internationalize the Chinese currency and further open the nation's tightly controlled capital account.
The official announcement of the pilot project comes as Chinese authorities appear increasingly concerned about a slowing domestic economy and a depressed local stock market, historically a constant source of financial instability and social grievances.
In a joint statement, China's securities regulator, the country's central bank and its foreign exchange regulator said they have released guidelines on the so-called Yuan Qualified Foreign Institution Investor (QFII) trial program, effective Friday.
According to the guidelines, the pilot project, which has an initial investment quota of 20 billion yuan ($3.1 billion), will begin with Hong Kong-based subsidiaries of Chinese asset-management companies and securities firms.
The guidelines stipulate that at least 80% of the yuan QFII funds must be invested in fixed-income products, while no more than 20% of such funds can be used for equities investments.
The yuan QFII plan follows the rollout in October of a trial program that allows the use of yuan acquired overseas for direct investment in China. But that earlier program doesn't allow foreign investors to make investments in domestic securities, financial derivatives, trust loans or loan repayment.
"This confirms another channel through which offshore yuan can flow back to China. This will further tighten CNH liquidity and drive up dim sum bond yields via more investment alternatives. Although the initial impact is limited given the small quota, that is the direction going forward," said Frances Cheung, a senior strategist at Crédit Agricole CIB, referring to the offshore yuan or CNH market in Hong Kong and the yuan-denominated "dim sum" bonds traded there.
Raising the scale of—and broadening—the channels for offshore yuan funds to flow back into China is a key prerequisite for Beijing to eventually transform the yuan into a major global reserve currency. Allowing overseas investors to use yuan for domestic investment also would help keep the world's second-largest economy humming without adding pressure on the country's massive foreign reserves.
Talk of an imminent announcement of the trial program and other forms of government support drove Chinese shares sharply higher in late Friday trading, ending a six-day losing streak that had pushed many stock prices back to where they were a decade ago.
The benchmark Shanghai Composite Index ended up 2.0%, or 43.94 points, at 2224.84, following a 6.5% cumulative loss in the past six sessions.
—Yue Li contributed to this article.
Write to Shen Hong at hong.shen@dowjones.com
Article from the Wall Street Journal