By PETER STEIN And SHAI OSTER
HONG KONG—China is accelerating efforts to push its currency deeper into world markets, racing ahead with a series of moves toward a new financial ecosystem with the yuan at its center.
A senior Hong Kong monetary official told The Wall Street Journal on Tuesday that China's central bank is "actively considering" new rules that would make it easier to bring yuan funds raised offshore back onto the Chinese mainland.
Changing those rules would remove a choke point threatening the fast-growing market for the Chinese currency—also known as the renminbi—that is developing in Hong Kong and elsewhere outside mainland China's borders. Currently, Chinese officials have to approve bringing any sizeable amount of currency—foreign and domestic—into the country. That system is aimed at closely managing the exchange rate and preventing speculation in the yuan.
New rules would make it easier and more attractive for global companies to access cheap funding in Hong Kong's yuan-bond markets and then use that money to boost their China business. They also bring the currency closer to a point where its value might be determined by the market, as are the values of the dollar, euro and all other major currencies.
But while many people believe China will continue to institute changes, full convertibility could be a long way off, and China may opt to stick with limited convertibility.
Eventually, wider use of the yuan outside China could redefine the balance of power in global currency markets, and in the broader economy, as the rest of the world begins trading more yuan-based assets and settling its bills with China in renminbi instead of the U.S. dollar, the global standard since the end of World War II.
Western and Chinese companies would be able to issue bonds or stocks in yuan and invest the proceeds in China without having to convert into or out of dollars, euros or any other currency along the way, as they've had to in the past when raising money abroad.
Ultimately, greater demand for renminbi could lessen demand for the dollar, raising U.S. interest rates and borrowing costs for everyone from the federal government to home owners.
Further evidence that Beijing is reducing its reliance on the dollar came Monday, when a state-run news agency reported that 7% of China's foreign trade in the first quarter was conducted in yuan, up from 0.5% a year earlier.
Concerns about the dollar's longer-term prospects contribute a sense of urgency to China's ambitions. China now holds more than $3 trillion in foreign exchange reserves, most of that in dollars.
The risks of dollar exposure were underscored when Standard & Poor's cut its outlook on U.S. government debt to "negative" Monday, unnerving global markets. Shares in both mainland China and Hong Kong fell on the news.
In a brief statement on the Chinese Foreign Ministry's website, ministry spokesman Hong Lei called on Washington to take "responsible policies and measures" to protect the interest of investors. A declining greenback hurts the value of China's vast dollar holdings.
The impact of such a change could be significant. Jun Ma, chief China economist forDeutsche Bank AG, noted that last year China attracted $100 billion in foreign investment. "If only a small percentage of that is in RMB, that will be a huge number," he said. Mr. Ma said he believed the new rules were "likely to come out in months."
Most of 44 multinational companies Mr. Ma surveyed said they would use yuan to invest in China if regulations allowed. Raising yuan offshore would reduce currency risks and would allow them to replace high-cost loans in China, where interest rates are over 6%, with low-cost financing from Hong Kong, where interest rates are around 2.6%.
China maintains tight control of its capital account, and some officials have expressed concern that excessive trade in the yuan outside China could allow speculators to destabilize the domestic monetary system.
But despite that, officials in China and Hong Kong are pushing ahead with several plans that weave China's currency more closely into the global marketplace.
This week, bankers in Hong Kong are finishing up the fund-raising for the first yuan-denominated stock to be sold outside China. The Hui Xian Real Estate Investment Trust, controlled by billionaire Li Ka-shing and backed by his Beijing property assets, is raising up to 11.2 billion yuan ($1.7 billion).
In an interview, the chief executive of Hong Kong's stock exchange said he's hopeful several more such listings can take place before the end of the year.
Monetary officials in Singapore, meanwhile, are holding talks with their counterparts in China in the hopes of setting up the infrastructure to expand trading of the yuan in the Southeast Asian city-state, according to people familiar with the situation.
In an interview Tuesday, Peter Pang, deputy chief executive of the Hong Kong Monetary Authority, told the Journal that Hong Kong officials were in discussions with their mainland Chinese counterparts to allow foreign direct investment into China using the yuan.
That change would eliminate one of the biggest objections raised by companies that have issued offshore yuan debt: It takes too long to get the money they raise into China because China has no set rules to allow foreign investment in renminbi. Instead, it's done on a case-by-case basis.
Last year, issuers ranging from McDonald's Corp. to the Asian Development Bank sold yuan-denominated "dim sum bonds" in Hong Kong, raising 36 billion yuan, more than double the amount raised in 2009. These securities, like the Hui Xian REIT, are aimed at tapping a growing thirst for returns from investors who are already accumulating large sums of yuan.
Since taking steps allowing the yuan to be freely traded in Hong Kong and allowing trade settlement in yuan, renminbi deposits in Hong Kong have ballooned to 407 billion yuan.
Global investors are drawn to the yuan by a widespread belief the currency will appreciate against the dollar for at least the next several years.
It has risen about 4% against the dollar since China abandoned a de facto peg last summer that had kept its dollar exchange rate unchanged for two years. High demand and low supply of securities in which to invest this offshore yuan have kept yields on dim sum bonds unusually low.