Faced with heightening concerns that China's soaring trade surplus is putting pressure on the yuan to appreciate faster, as well as fueling inflation and the asset price bubble, the central government has announced a series of measures to slow expansion of its current account surplus and to encourage capital outflows.

Beijing, in its latest move, kicked off a pilot program last Monday allowing mainland individuals to invest directly in Hong Kong-listed securities - a move some see as China's biggest step yet towards making the yuan a free and fully convertible currency.

The move was swiftly followed the next day by the fourth interest rate hike for this year, signaling that the authorities' concern over the country's rising inflation and roaring stock market has further intensified.

"At this stage, you can already see a price bubble in China's assets market," says Po Mak-hung, associate professor of economics at Hong Kong Baptist University.

"A limited amount of assets is being pursued by a lot of liquid money and speculation, and this cannot be sustained in the long run. So the government has to do something to tackle the excess liquidity problem."

One way to tackle the problem is to encourage capital outflow, by allowing private and public sectors to purchase assets around the world.

That is what China is doing now, using a gradualist and experimental approach, Po says.

Under the pilot scheme, residents from all over the mainland will be allowed to invest in Hong Kong-listed equities via the Bank of China (3988) branch in Tianjin, near Beijing.

Mainland investors will be permitted to use not only their existing foreign exchange deposits, but also to covert yuan into foreign currencies in order to invest in Hong Kong-listed assets.

There is no official ceiling imposed on the amount of each individual's investment.

Bank of China executives said last Thursday that the bank will start accepting investors' applications to open foreign currency accounts and to invest in Hong Kong-listed securities from this week.

According to a Reuters report, the program will be extended to Shanghai next if the trial in Tianjin succeeds, and the Industrial and Commercial Bank of China (1398) will be a designated bank.

"In theory, this move will help alleviate the excess liquidity problem, but the scale and scope of this policy is still unknown," says Alan Siu, executive director of the APEC Study Center at the University of Hong Kong.

He says the gradualist approach taken by SAFE means that the volume of outflow will increase over time and will "siphon off a bit" of the mainland's massive liquidity.

"But given the size of the Hong Kong market, this policy itself will not drain off enough liquidity to cool down the overheating economy," Siu says.

While the program currently gives mainlanders access only to the Hong Kong market, the scope is expected to expand gradually.

Grace Ng, economist at JPMorgan Chase, believes that China's growing liberalization on capital outflows means that US$120 billion to US$200 billion (HK$936 billion to HK$1.56 trillion) of the nation's private savings may funnel out of the country annually in the coming years.

In addition to easing the central bank's burden of managing liquidity, Ng says the rising capital outflows relieve the risk of rapid escalation of the domestic asset bubble, especially the A-share market.

Beijing has also stepped up efforts to encourage state-level investments in overseas assets. In June, the mainland's State Investment Company pumped US$3 billion of its forex reserves in US- based private equity firm Blackstone Group.

Last month, state-owned China Development Bank entered into an agreement to invest up to 9.8 billion euros (HK$103.2 billion) in Barclays to help fund the British financial group's takeover bid for Dutch bank ABN Amro.

The increasing state-level overseas investments reflects China's efforts to encourage capital outflows amid the country's abundant liquidity, and should ease upward pressure on the yuan.

Siu of HKU believes the impact on the yuan's exchange rate will be minuscule in the short term "particularly in view of last week's interest rate hike, which will make speculative inflow more attractive."

SAFE's new policy move - hailed by some as being China's biggest step yet towards liberalization of its capital account - has raised hopes that Beijing is increasingly leaning towards turning the yuan into a freely-floated and fully convertible currency.

But some experts say the mainland still has a long way.

"China has been studying capital account opening since 1997, and [SAFE's new policy] is a big and important step but it will still take at least five or more years to see the thing really happen," says a US-house forex trader.

Despite the mounting pressure from China's trading partners - particularly the United States - on Beijing to increase the flexibility of the yuan exchange rate, Chinese authorities have reiterated several times that they will take a gradual approach towards a more free currency.

They argue that a sudden and rapid yuan appreciation would adversely affect the export sector, creating further unemployment and disturbing the nation's social harmony.

Po of Baptist University says that before making the yuan a fully convertible currency, Beijing should experiment by making it a medium of trade with its neighboring trade partners, or at least with Hong Kong.

"In this way, other countries will start to hold the yuan as reserve, and then even with a high trade surplus, China will not necessarily have excess money supply in its domestic system," Po says.

He adds that this will help Chinese authorities to accumulate experience and see how the domestic economy will be affected once the yuan is finally allowed to become fully convertible.