Vice-Premier Li Keqiang yesterday announced a raft of more than 30 measures to boost the local economy by encouraging two-way investment and trade between Hong Kong and the mainland and strengthening the city's role in the internationalisation of the yuan.

The business community and trade organisations generally welcomed Li's proposals, made on a visit to Hong Kong, hoping they would improve gloomy market sentiment.

The Hang Seng Index has dropped about 3,000 points, or 12 per cent, over the past two weeks due to worries over the US and European sovereign debt crises.

"The central government will exert its utmost to contribute to the prosperity and stability of Hong Kong and to the common development of Hong Kong and the mainland," Li said. "Its status as a financial centre in Asia and globally is crucial for Hong Kong's development."

Of the measures he announced at a forum on the nation's 12th five-year plan, 12 are related to financial services and the development of the offshore yuan market.

One key scheme to support the stock market is to allow mainland investors to invest in Hong Kong stocks by launching the long-awaited index-tracking Exchange Traded Fund backed by a portfolio of Hong Kong stocks.

The fund, to be listed on the stock exchanges in Shenzhen or Shanghai, will allow mainlanders to invest in Hong Kong stocks.

Several other measures will encourage expanded use of the yuan. One is a 20 billion yuan (HK$24.4 billion) quota for Hong Kong companies to invest in securities on the mainland via a yuan-denominated Qualified Foreign Institutional Investors (QFII) scheme. (A US dollar-denominated scheme already operates.) This could help achieve a better return for the 554 billion in yuan now sitting as low-yielding deposits in banks in Hong Kong.

A scheme allowing companies to settle trades in yuan, currently limited to 20 provinces, is being expanded nationwide. Bejing will also allow more mainland companies to sell yuan bonds in Hong Kong.

Hong Kong companies will be able to invest on the mainland using yuan - making it easier to repatriate to the mainland yuan raised through bonds or share issues. There are still capital controls and currently all transfers need approval.

"The new measures will encourage more companies to issue yuan bonds or yuan shares in Hong Kong," said Andrew Fung Hau-chung, the head of treasury and investment at Hang Seng Bank. "China is speeding up its pace of internationalising the currency by these new measures.

"Most importantly, the vice-premier has confirmed Hong Kong's role as an offshore yuan trading centre for China. This would help Hong Kong fend off rivals such as Singapore or London which also want to develop as yuan trading centres." The yuan trade is considered a key driving force for the Hong Kong economy, which shrank in the second quarter relative to the first quarter.

Li also said Beijing planned to further open up service industries to local firms under by the eighth supplement to the Closer Economic Partnership Arrangement, to be signed this year.

The new initiatives come as Hong Kong's district council elections approach and social problems spread.

Political commentator Johnny Lau Yui-siu said: "Beijing is of the view that if economic issues are not handled properly, they would escalate into political problems."

At a dinner with legislators last night, Li gave what was seen as a show of support from Beijing for Chief Executive Donald Tsang Yam-kuen and his administration following recent criticism by the head of the State Council's Hong Kong and Macau Affairs Office, Wang Guangya , who said civil servants trained in the colonial era were good at taking orders but not at making policy, and lacked the ability to plan for the long term. Tsang and most of his ministers are ex-civil servants.

Li said Tsang's administration had been industrious and under its leadership Hong Kong was heading in the right direction even though it still faced difficulties and challenges. "The central government affirms all the good work you have done and expresses sincere gratitude to all of you," Li said.

Helping hand

• Hong Kong companies to be allowed to make direct investments in yuan on the mainland
• Cross-border trade settlement in yuan to be extended from 20 cities to the whole country
• Qualified foreign institutional investors in Hong Kong to be allowed to invest in mainland equity markets subject to initial quota of 20 billion yuan
• Mainlanders to be allowed to invest indirectly in HK stock market via exchange-traded fund
• Mainland service industry to be further opened to HK firms
• HK travel agencies to be encouraged to set up shops on the mainland

Full text of Li Keqiang's speech on Hong Kong's future economic development.

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