CHINA is studying pilot programs that will allow domestic investors to make overseas investments using the Chinese currency, a move that could pump fresh oxygen into the stagnant offshore yuan pool.

    “The central bank is designing RQDII (Renminbi Qualified Domestic Institutional Investor) and QDII2 programs to enable investment in offshore markets,” said Wang Dan, deputy director general in the monetary policy department at the People’s Bank of China.

    Yuan deposits in Hong Kong, the biggest offshore yuan hub, stood at 937 billion yuan (US$153 billion) at the end of August, the lowest level since February.

    The yuan pool expanded much more slowly this year than market participants expected, mainly because of new ways for foreign investors to use yuan in China to buy high-yielding assets, as well as yuan being cheaper in offshore markets.

    As an example of foreign investors’ interest in onshore yuan assets, the 270 billion yuan Renminbi Qualified Foreign Institutional Investor (RQFII) quota granted to Hong Kong was exhausted in less than three years.

    The accumulation of yuan deposits outside of China has for years relied heavily on cross-border trade settlement, with some additional flows from yuan overseas direct investment and Chinese travellers converting currency overseas.

    It worked well in the first few years of the offshore yuan market, given the premium the so-called CNH enjoyed over its onshore CNY counterpart, encouraging companies to bring yuan funds to Hong Kong.

    However, as the premiums have reversed in the past few months, the measure that allows Chinese investors to use yuan to buy shares and other investment products abroad will no doubt open a crucial new channel for the “redback” to flow into offshore markets.

    Offshore yuan reserves will have to reach 11 trillion yuan for the currency to achieve one-third of the U.S. dollar’s international status within 15 years, based on the experience of internationalizing the dollar, the Hong Kong Financial Services Development Council said in a report. (SD-Agencies)