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UPDATE 1-China to scrap quota restrictions on QFII, RQFII schemes

(Recasts, adds comments and background throughout)

SHANGHAI/HONG KONG, Sept 10 (Reuters) - China's foreign exchange regulator said on Tuesday that it had decided to scrap quota restrictions on two major inbound investment schemes, as a weakening yuan and rising outflows prompt Beijing to attract more foreign capital.

China's State Administration of Foreign Exchange (SAFE) has decided to remove quota restrictions on the dollar-dominated qualified foreign institutional investor (QFII) scheme and its yuan-denominated sibling, RQFII, it said in a statement on its website.

It said the move would "make it much more convenient for overseas investors to participate in China's domestic financial markets, making China's bond and stock markets more broadly accepted by international markets."

The removal of quotas comes amid an escalating trade war between China and the United States that threatens growth in the world's second-biggest economy.

Beijing hopes that foreign capital inflows could help to offset rising outflows and lend support to China's yuan currency, which has dropped to its lowest levels against the U.S. dollar since the 2008 global financial crisis.

China's securities regulator published draft rules earlier this year that would combine the QFII and RQFII programmes while also simplifying access for overseas investors.

Jean-Charles Sambor, deputy head of emerging market fixed income at BNP Paribas Asset Management said that the scrapping of quotas is "another big step in the right direction."

"It is a further commitment to irreversible capital account opening and will be seen as positive by markets participants," he said.

China introduced the QFII scheme in 2002 and RQFII in 2011 as part of efforts to encourage foreign participation in its financial markets. But the channels have become increasingly overshadowed by Stock Connect and Bond Connect schemes, which allow overseas investors to access China's onshore markets with no quotas.

Eugenie Shen, head of asset management group at Asifma, said that ending quotas was a "good way to preserve the attractiveness of the QFII and RQFII channels," noting that the schemes offer a broader range of investable securities than through Stock Connect.

Khiem Do, head of Greater China investments at Barings, said that the scrapping of quotas could help to encourage inflows into China's onshore stock and bond markets.

"At the end of the day whether foreign investors will invest more in China or not depends on the current and future fundamental outlook of the underlying economy, trend of corporate earnings, attractiveness of their yield and yield spreads, and the perceived strength or weakness of the (yuan)," he said in an emailed comment.

Despite the ending of QFII and RQFII quotas, SAFE made no moves on Tuesday to ease restrictions on the outbound Qualified Domestic Institutional Investor (QDII) scheme.

"It would equally be welcome if the QDII investment rules can also be relaxed," Do said. (Reporting by Samuel Shen and Andrew Galbraith in SHANGHAI and Noah Sin in HONG KONG; Additional reporting by Karin Strohecker in LONDON and Beijing Monitoring Desk)