Source: The Financial Times                    Date: 11 May, 2011

The Bank of Korea plans to invest some of its USD307 billion of foreign exchange reserves in renminbi-denominated assets on the Chinese mainland, as the central bank diversifies away from the US dollar. The bank has applied to Beijing for a quota under the qualified foreign institutional investor (QFII) programme, which allows overseas groups to buy equities and bonds on the mainland.

“It is time to think about directly investing in mainland assets, given China’s fast-growing economy and Beijing’s increasing efforts to internationalise its currency,” Mr. Kang Sung-kyung, a senior BoK official, said. “Although there are still many restrictions against foreign investors, we believe China’s capital markets will eventually open up,” Mr Kang said.

China’s financial markets remain largely closed for foreign investors but the QFII programme permits a number of big foreign investment firms to buy Chinese domestic securities.

Beijing has so far granted quotas totalling about USD21 billion to just over 100 qualified foreign investors, including three central banks – in Norway, Hong Kong and Malaysia.

China’s strict capital controls have meant that for decades the renminbi has been little used outside the country’s borders. However, in the wake of the global financial crisis, Beijing has accelerated reforms to increase international use of the currency, especially for trade transactions, seeking to reduce its reliance on the US dollar.