UPDATE 1-China to allow more foreign investors in local bonds

* Govt to open bond market wider to foreign investors

* To allow more domestic companies to issue bonds abroad (Adds details)

By Langi Chiang and Koh Gui Qing

BEIJING, Nov 23 (Reuters) - China is set to allow more foreign companies to invest in the domestic bond market, a central bank official said on Wednesday, in line with the country's pledges to liberalise its financial markets over time.

"With wider use of yuan abroad, we will actively and gradually push forward the opening up of China's bond market and allow more foreign investors to invest in the domestic bond market," Xie Duo, head of financial markets at the People's Bank of China, told a financial forum in Beijing. "We will allow more domestic institutions to issue bonds abroad if they are willing."

As China seeks to increase the use of the yuan in trade settlements to reduce reliance on the U.S. dollar, overseas yuan holders are keen to plough money back into China's bond market to get steady, if not higher returns.

The government has given permission for more than 100 foreign institutions to invest in its stock and bond markets through a quota system dubbed the Qualified Foreign Institutional Investor (QFII) scheme. (Editing by Chris Lewis)