by Samuel Shen and Georgina Lee

SHANGHAI (Reuters) – The internationalization of the yuan will take another step on Monday when the shares of several Chinese companies can be traded in the Chinese currency on the Hong Kong stock market.

The giants Alibaba and Tencent are among the 24 companies whose shares will, from Monday, be listed and traded in both yuan and Hong Kong dollars on the Hong Kong Stock Exchange.

This system is initially aimed at foreign investors holding yuan before being extended to investors in mainland China via the Hong Kong-China Stock Connect link. Offshore deposits (outside China) in yuan are estimated at some 833 billion yuan (107 billion euros) in Hong Kong.

For fund managers, the measure illustrates Beijing’s desire to extend the use of the yuan outside the country’s borders and to increase investments in the currency, which would prevent a flight of capital to currencies in the higher yield like the US dollar.

“China encourages the internationalization of the yuan to avoid geopolitical risks and reduce dependence on the dollar, and for this it is necessary to develop the use of Chinese currency,” said Ding Wenjie, at China Asset Management.

The strategist expects this model to be extended later to debt securities and even alternative assets.

Observers have pointed out that interest in yuan stocks may initially be limited – given near-term risks like a weakening Chinese currency and economy – before demand gradually picks up.

The US dollar, used for 42% of international payments, remains the dominant currency. The yuan’s share is only 2.29%, down from 1.95% two years ago.

China’s efforts to strengthen its currency’s place on the world stage saw a significant breakthrough with Pakistan paying for its first import of Russian crude at a discounted yuan price. The announcement was made on Monday.

(Samuel Shen and Georgina Leen, Laetitia Volga, edited by Blandine Hénault)

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