UPDATE 1-China "mini-QFII" could launch this year -media

* Programme would allow for yuan funds in HK to buy A-shares

* Aimed at promoting international use of yuan -CSRC

* Mini-QFII may not boost A-share market-analysts (Adds analyst comment, details)

SHANGHAI, July 1 (Reuters) -- China may let Hong Kong subsidiaries of domestic brokerages and fund managers facilitate investments of offshore yuan deposits back into mainland capital markets in a pilot scheme as soon as this year, local media said on Thursday.

Under the scheme, dubbed "mini-QFII", institutions will be allowed to channel yuan held offshore into investments in China within certain quotas, the 21st Century Business Herald reported.

Currently, foreign investors can only invest in local-currency stocks and bonds in China under the Qualified Foreign Institutional Investor (QFII) scheme, after converting foreign currencies into yuan.

Hong Kong-based banking sources told the newspaper that they expected the scheme to be implemented either by the end of this year or early 2011.

The mini-QFII scheme, when implemented, "will bring down the threshold for fund companies to participate in the QFII market," said Xav Feng, head of research for China and Taiwan at fund-rating agency Lipper.

"You will see more new products on the market, which is a positive development for China's fund industry," said Feng.

Yao Gang, the vice chairman of China's securities regulator, said last weekend that the government was studying how to promote the "mini-QFII" scheme, but did not give a timetable.

The China Securities Regulatory Commission (CSRC) was studying the possibility of allowing Chinese brokerages to launch yuan-denominated mutual funds in Hong Kong to invest in China's A-share market, Yao said.

The scheme is part of China's plans to promote international use of the yuan, in order to reduce the country's reliance on the U.S. dollar in cross-border transactions.

Those efforts include a separate programme for allowing some foreign trade transactions to be conducted in yuan.

One of the constraints to the development of that programme has been that businesses being paid in yuan have few places to park their money other than bank deposits, meaning that creating more opportunities to invest yuan could help in the development of those efforts as well.

The "mini-QFII" plan is likely to be limited to around 10 billion yuan ($1.5 billion) initially, fund consultancy Z-Ben Advisors said in a research report on Wednesday.

The full-fledged QFII programme, by comparison, enables institutional investors including UBS (UBS.N)(UBSN.VX) to invest a total of roughly $30 billion in China's capital markets.

But channelling offshore yuan deposits back to the mainland via the mini-QFII scheme may not necessarily boost valuations of Shanghai- or Shenzhen-listed A-shares, many of which currently trade at a discount to their Hong Kong-listed H-share counterparts, said Lipper's Feng.

"What the A-share market lacks is not money but confidence," he said.

The domestic market's lacklustre performance will likely continue until a clearer picture of the economic outlook emerges, especially regarding interest rates, he said.

China's stock market remains one of the world's worst performers this year, down around 27 percent over worries about the economy and government tightening. The benchmark Shanghai Composite Index .SSEC fell 23 percent in the second quarter. (Reporting by Soo Ai Peng, Farah Master and Samuel Shen; Editing by Jason Subler and Jonathan Hopfner)