The securities will have a maturity of up to three years, the Beijing-based lender said in a statement to the Shanghai Stock Exchange today. China Construction Bank, the third-largest, said last month it plans to sell bonds in the city.

The sale expands the city's economic ties to the Chinese mainland. The Chinese yuan has climbed 5.8 percent in the past year against the Hong Kong dollar, which is fixed to the U.S. dollar, making it more attractive for local investors to hold the mainland's currency.

"It's a nice investment as you get the pick-up on the currency appreciation and importantly, spurs the development on the yuan bond market," said Ben Simpfendorfer, a currency strategist at Royal Bank of Scotland Plc in Hong Kong. "It's another step for the integration between the two economies."

China's Cabinet and central bank in January said the country's companies will be allowed to sell yuan-denominated bonds in Hong Kong. The Hong Kong Monetary Authority, that's kept the currency pegged at around 7.8 to the dollar since 1983, said May 24 that it has no plans to switch to a link to the yuan.

Closer Economic Ties

Closer economic ties with the mainland, the biggest export destination for Hong Kong, helped the economy grow 6.9 percent last year, more than twice the U.S. growth of 3.3 percent. Hong Kong is a "testing ground" for the yuan as Beijing takes steps to make its currency more flexible, Hong Kong Monetary Authority Chief Joseph Yam said June 29 last year.

Construction Bank said it may sell 5 billion yuan of subordinated bonds in Hong Kong. The proposed sale will be put to a shareholders vote on June 13. Bank of China and China Construction Bank Corp. are the first to join the pilot program.

China has granted a number of concessions to the former British territory. Under the Closer Economic Partnership Arrangement, the accord reached in 2003 as part of China's undertakings on joining the World Trade Organization, The mainland allowed HSBC's Asian unit, BOC Hong Kong (Holdings) Ltd. and 38 rival Hong Kong banks to accept yuan deposits from the city's residents starting Feb. 2004.

In a second phase announced in Oct. 2005, China scrapped a 100,000 yuan ($13,000) credit limit on yuan currency credit cards issued in Hong Kong.

China's cabinet is also studying measures to set up a framework for Hong Kong lenders to issue yuan debt and allow cross-border trades of goods and services to be settled in yuan.

Bank of China's Hong Kong-listed shares fell 1 percent to HK$3.85 on May 25, extending this year's decline to 10 percent.