Yuan can flow back to China by year-end: HK official

HONG KONG (Reuters) - A plan to allow foreign investors to buy mainland securities using yuan raised offshore could be implemented by the end of this year, a senior Hong Kong government official said on Friday.

Also known as mini-QFII or renminbi-QFII, the program would offer foreign investors holding yuan a crucial avenue to invest the Chinese currency, Julia Leung, Hong Kong's undersecretary for financial services and the treasury, told Reuters Insider in an interview.

"We are hopeful that it will be launched by the end of this year. We can never say for sure, but we hope so," she said.

Before the scheme was announced by China's Vice-Premier Li Keqiang on Wednesday, many investors had been reluctant to hold too much yuan despite China's solid economic growth and Beijing's drive to promote the use of the currency.

Under the scheme, modeled after the larger Qualified Foreign Institutional Investor program, foreign investors will be allowed to buy mainland securities up to an initial quota of 20 billion yuan ($3.1 billion), a move aimed at internationalizing the use of the currency.

"It's not the size that matters," Leung said. "It's a start, and we expect that as the pilot project goes on, it will be expanded."

Several investment banks including HSBC Holdings Plc have said the small size of the quota was a result of China's fear of uncontrolled capital inflows. The country currently has a closed capital account.

The mini-QFII program would be administered by China's stock market regulator, the China Securities Regulatory Commission, which would also decide who would be first to receive a license, Leung said.

"The thinking, as I understand it, initially at least, is to have the subsidiaries of fund houses or securities companies with a mainland background," Leung said. "But we certainly would like, and we are talking to the CSRC, to broaden it to all companies in Hong Kong."

Hong Kong-listed shares of China-linked brokerages such as Shenyin Wanguo (HK) Ltd and Guotai Junan International Holdings Ltd rallied after the mini-QFII announcement, on expectations that they will be first to benefit from the program.

Leung also dismissed concern that allowing Hong Kong companies to directly invest in mainland China using yuan could add fuel to inflation. Current policy only allows foreign direct investments in U.S. dollars.

"China already allows U.S. dollar investments, so why not in renminbi," she said, referring to the Chinese currency by its other name. "Renminbi is already part of the existing money supply."

(Additional reporting by Saikat Chatterjee; Editing by Chris Lewis)