China's securities regulator said it approved an application from Hong Kong's de facto central bank for a Qualified Foreign Institutional Investor license, which would allow the territory to diversify its foreign-exchange reserves into the Chinese yuan.
China has issued QFII licenses to the central banks of Norway and Malaysia as well as to sovereign-wealth funds in Singapore and Abu Dhabi as part of its efforts to increase the use of the yuan around the world.
Any diversification into yuan assets by the Hong Kong Monetary Authority likely will be small at first. Assets denominated in the currency are considered more risky and less liquid than similar assets denominated in fully convertible major currencies, and the investment quotas issued by China are small.
Norman Chan, chief executive officer of the Hong Kong Monetary Authority, said in February he was interested in studying the possibility of including yuan assets in the investment portfolio of the city's Exchange Fund because of the growth potential of mainland China's economy. The HKMA uses the fund to maintain the Hong Kong dollar's peg to the U.S. dollar and ensure financial stability in the territory.
He also said any diversification of the fund's portfolio would be aimed at ensuring long-term returns. The HKMA held $266.1 billion in foreign-exchange reserves at the end of September, mostly made up of assets denominated in the U.S. dollar and euro.
The HKMA on Monday confirmed that the China Securities Regulatory Commission had approved its QFII license, saying the Exchange Fund "has always been interested in the yuan market."
After the securities regulator issues a QFII license, a foreign investor must obtain an investment quota from the State Administration of Foreign Exchange before making any investments. The process typically takes several months.
China awarded Norway's central bank a $500 million investment quota, while Malaysia's received a quota of $200 million.
The QFII program, launched in 2003, is the only way foreign investors can trade China's domestically listed yuan-denominated Class A shares and exchange-traded bonds.