Beijing has enlisted the help of Hong Kong financial institutions to bolster the mainland stock market, allowing them to raise yuan funds for A-share investments.
The move is expected to consolidate Hong Kong's role as the dominant offshore yuan centre.
Citing the policy as a boost to local institutions' yuan businesses, the Hong Kong Monetary Authority said it would keep in close contact with the mainland regulators to develop yuan businesses.
The China Securities Regulatory Commission published a new rule governing the renminbi qualified foreign institutional investor (RQFII) scheme late on Wednesday, allowing institutions registered in Hong Kong to participate in the 270 billion yuan (HK$336 billion) market.
Beijing is set to further liberalise the market soon to facilitate RQFII funds' purchase of mainland stocks, according to two sources close to the CSRC.
The RQFII scheme, launched in 2011, previously allowed only Hong Kong subsidiaries of mainland brokerages and fund management firms to raise offshore yuan to invest in the mainland bond and A-share markets. RQFII funds could previously invest only up to 20 per cent of their assets in mainland index funds while the remaining 80 per cent was restricted to fixed-income products.
The new rule maintains the 20 per cent cap on equity-based investments but it can be spread to cover individual stocks, warrants and index futures.
"The announcement indicates that China's authorities are comfortable with the RQFII scheme," ANZ Banking said in a report. "We believe a similar scheme will likely roll out in Taiwan if the current renminbi clearing platform and the cross-strait financial co-operation further deepen."
The expansion of the RQFII scheme will be followed by a decision to allow mainland-based residents from Macau, Hong Kong and Taiwan to invest directly in A shares with their own yuan funds, according to the CSRC.
Beijing has been striving to shore up the market, which is down 62 per cent from its record high reached in October 2007.
CSRC chairman Guo Shuqing is envisioning a capital influx to revive the market.
At the end of last year, Guo said the RQFII quota would be raised to 270 billion yuan from 70 billion yuan.
However, the new RQFII, which is aimed at shoring up investor confidence, failed to lift the market yesterday.
The Shanghai Composite Index fell 0.98 per cent on concern an imminent resumption of initial public offerings would cause panic selling.
"Investors are still vulnerable to negative news," said Shenyin Wanguo Securities analyst Li Xiaoxuan. "The market will remain weak in the coming days."
Aside from Hong Kong institutions, the CSRC also allows units of mainland banks and insurers that are based in the city to raise RQFII funds.
Sources said the regulators would also increase the investment cap.
Separately, Gui Minjie, the chairman of the Shanghai Stock Exchange, said on the sidelines of the National People's Congress the bourse planned to launch equity options for blue-chip stocks this year, offering a new hedging tool for institutions.Topics: CSRC Stock Market China More on this: