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China has established a rule to allow foreign direct investment (FDI) in the yuan legally obtained overseas, a step toward the government's goal of internationalizing its currency.

The move is aimed at promoting trade and investment by expanding cross-border use of the yuan and supporting the development of the yuan market in Hong Kong, the People's Bank of China (PBOC), or the central bank, said in a statement on its website.

It said qualified foreign investors can directly apply for yuan settlements through the program with banks, making procedures for related financial services easier.

The Ministry of Commerce (MOC) also issued a statement on its website, giving detailed definitions and application procedures for FDI in yuan.

According the new arrangement, FDI projects of more than 300 million yuan ($47.02 million) must be approved by the MOC before investors start their businesses in finance guarantees, foreign investment companies and macro-controlled industries.

Magnus Montan, head of the international business at HSBC China, said the newly issued rule marks an important step in the internationalization of the yuan, and it provides more ways for offshore Chinese currency to flow back to the Chinese mainland.

He added that the new rule also gives overseas companies more options for them to settle their investments in China in different currencies and avert risks brought by exchange rate fluctuations.

Chan Ka Keung, Secretary for Financial Services and the Treasury Bureau of the Hong Kong Special Administrative Region government, said the rule can boost enterprises' intentions to issue yuan-denominated bonds in Hong Kong.

Chan said he believes the new FDI measures will boost the yuan-denominated bond market in Hong Kong with simpler procedures for foreign investors to raise funds in yuan for their investment in China's mainland.

According to the statistics of the PBOC, 1.05 trillion yuan worth of cross-border trade had been settled in yuan from July 2009 to April.

Shen Danyang, MOC spokesman, said the new rule will not impact the foreign exchange reserve with sharp amount changes, but open capital projects may generate risks of hot money.

Therefore, the PBOC said it will establish a system to share and manage information with authorities and enhance supervision in order to highlight the responsibilities of banks to prevent risks.

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