UPDATE 1-China may allow direct yuan investments in Hong Kong

HONG KONG Dec 28 (Reuters) - China may allow direct investments of yuan into Hong Kong as part of the city's growing role as a testing ground for yuan-denominated services, the city's leader said on Monday after meeting China's Premier.

Hong Kong, which has been playing an increasingly active role as a centre for yuan denominated products like bonds, and as a cross-border trade settlement hub in yuan CNY=, could in future be used as an overseas testing ground for direct yuan investments.

"(Beijing will) continue to expand Hong Kong's role as a cross-border trade settlement centre and explore the development of the yuan's trade financing ... project financing and to use the yuan for direct investments in Hong Kong," said the city's leader Donald Tsang after meetings with China's President Hu Jintao and Premier Wen Jiabao in Beijing.

Tsang did not give specifics on such yuan investments.

Tsang added that Beijing was fully committed to supporting Hong Kong as a financial centre with its economy now showing signs of recovery from the financial crisis.

He said Shanghai wouldn't take over Hong Kong's role as a financial centre, and that China's leaders would preserve the two cities' prospects in a complementary manner.

With respect to Hong Kong's fledgling yuan-denominated bond market, he said Beijing would continue to back this sector's development, and encourage financial institutions to expand their range of debt products.

(Reporting by James Pomfret; Editing by Ruth Pitchford)