Premier Wen Jiabao this week said the central government was considering such moves, long sought by financial institutions and local government officials.

A senior financial official at the Chinese Academy of Social Sciences said the announcement was very likely today and David Li Kwok-po, the chairman of Bank of East Asia, yesterday said he expected Mr Jia could unveil more details about allowing the sale of yuan-denominated bonds.

The moves would mark another small but significant step towards full convertibility for the yuan, although the central government is likely to retain tight controls on capital flows. About 20 billion yuan of officially sanctioned funds circulate in Hong Kong's financial system but the true total is probably much higher.

Under the original Cepa agreement, Hong Kong and Macau individuals and businesses were permitted to conduct yuan banking but the scope was limited.

Hong Kong has been lobbying Beijing since 2003 to allow corporations to conduct yuan business with banks in the territory as well as issue yuan-denominated bonds.

'Hong Kong is already a financial centre for the yuan and allowing yuan bonds there is a logical next step,' said Fan Jianjun, a senior researcher at the Financial Research Institute at the Development Research Centre of the State Council.

'It would be win-win because yuan interest rates are generally lower than global averages so it would provide a lower cost of capital to issuing parties and could also relieve pressure on the yuan.'

Some analysts have warned, however, that easing controls could increase speculative pressure on the yuan. China's trading partners have been pressuring Beijing to revalue the yuan to help reduce its swelling trade surplus.

'Issuing [yuan] bonds would mean exposing the currency to any kind of international portfolio investment which potentially could be one window for international speculators to punt [the currency],' said Credit Suisse chief China economist Dong Tao.

In addition to seeking to appease its foreign critics, the government may also want to slow the rapid build-up of foreign exchange reserves, which surged US$30 billion last month to US$925 billion, the biggest monthly rise since 2004.

A Hong Kong-based yuan bond market could also provide an indirect spur to development of the mainland's fledgling corporate bond market, which has been stunted by central government concern that rapid expansion could lead to a wave of corporate defaults and add fuel to growth.

At present, only large, state-owned enterprises can sell corporate bonds and the approval process is long and complicated.