Hong Kong may reach an agreement with the Chinese mainland "in the next few months" on expanding a program that lets investors buy financial products using yuan raised overseas, a government official said.

Talks are progressing on boosting the quota for the Renminbi Qualified Foreign Institutional Investor (RQFII) mechanism by 200 billion yuan ($32 billion), that will also add new products and allow a broader range of participants, according to Julia Leung, the undersecretary for financial services and the treasury.

"I'd like to see an agreement in the next few months," Leung said in an interview in New York on Thursday. Changes under an agreement, including the quota expansion, will probably be phased in, rather than take place simultaneously, she said. The RQFII's current quota is 70 billion yuan.

China approved the RQFII program last December, allowing the Hong Kong units of Chinese financial companies to raise yuan offshore for investment in Chinese capital markets and recently agreed in principle to raise the quota. Candidates for an expanded program include banks and insurers, both Chinese and non-Chinese, Leung said.

While the yuan is freely convertible for trade transactions, investment from Hong Kong and from overseas into stocks or bonds in China can only be made using quotas assigned by the government and direct investments need regulatory approval.

The China Securities Regulatory Commission, the People's Bank of China and the State Administration of Foreign Exchange are involved in the talks on the mainland side, Leung said. The Hong Kong parties include the Financial Services and the Treasury Bureau and the Securities and Futures Commission, which will vet any new products under the RQFII program, she said.

Talks on mutual recognition of fund products by Hong Kong and the mainland are also under way, Leung said. The issues involved are more complicated and an agreement is further away, Leung said, declining to give a possible time frame.

"Hong Kong is in a very good position" to act as a testing ground as China moves toward full convertibility of the yuan and introduces new investment products, Leung said.

A task force in Hong Kong charged with examining the establishment of a Financial Service Development Council will publish its report in the "short term," Leung also said. The body's role will be advisory and not regulatory, she said.

The city government is happy with the current system whereby the Hong Kong Monetary Authority invests fiscal reserves, and has no plans to set up a separate sovereign wealth fund like those in Singapore and the mainland, Leung also said.

Leung was in New York to speak with investors and regulators, including the US Treasury Department.

(HK Edition 12/08/2012 page2)