The People's Bank of China (PBoC) has introduced a pilot scheme that will enable Hong Kong banks to invest yuan holdings in the mainland's interbank bond market, the Hong Kong Monetary Authority (HKMA) said Tuesday.

Lenders wanting to take part in the scheme will need approval from the PBoC, according to new regulations the bank put up on its website.

"The launch of the scheme has opened up a channel for yuan funds and financial institutions in Hong Kong to invest on the mainland,'' HKMA Chief Executive Norman Chan said in a statement. "This will further promote the development of yuan trade settlement in Hong Kong, and enhance the attractiveness of yuan offshore business in Hong Kong."

The new arrangement will increase Hong Kong's "attractiveness" as an offshore center, Chan said.

"It's a big boost for the offshore renminbi market," said Steve Wang, a credit strategist for Bank of China International Securities Ltd in Hong Kong. It "would allow offshore holders of yuan to invest the money directly in China rather than going through middlemen. It's a step in the right direction that really opens the domestic securities market."

The move comes as China seeks to broaden the use of its currency. In June 2009, Beijing approved use of the yuan to settle cross-border trade deals with Hong Kong as part of a drive to reduce reliance on the US dollar. The popularity of that program was limited by the investments available for the currency offshore.

Each overseas bank will need a special account at a local lender for debt transaction clearing, according to the new PBoC regulations that came into effect Tuesday.

Overseas banks must first apply for investment quotas on the inter-bank market, the central bank said.

The new regulations are also applicable to foreign central banks, which should disclose funding sources and investing plans in their applications.

There were a total 14.3 trillion yuan of bonds on the interbank market as of June, including debt issued by the Central Government, banks and companies, the central bank said July 30.

Yuan deposits in Hong Kong climbed 4.8 percent in June to a record as Beijing ended a two-year peg against the dollar. Currently, trade is the main way for offshore holders of yuan to return money to the mainland, Wang said.

The program is a step forward towards the internationalization of the renminbi, said Dariusz Kowalczyk, a currency strategist at Credit Agricole CIB in Hong Kong.

"By opening the new avenue to invest Chinese yuan funds, the currency will become more attractive and may come under further upward pressure in the offshore market in Hong Kong," Kowalczyk said.