(Corrects spelling to "freeing" in second last paragraph)
* China c.bank supports off-shore yuan market
* MSCI to include China stocks on June 1
* Regulators seek to avoid offshore yuan liquidity crunch
SHANGHAI, May 18 (Reuters) - China's central bank announced a series of measures on Friday to support cross-border fund flows, in an apparent effort to avoid a potential liquidity crunch in the offshore yuan market around June 1, when Chinese shares will be included in MSCI's benchmark indexes.
China's MSCI entry is expected to trigger a surge in foreign money flows into yuan-denominated A shares, largely via cross-border stock connect schemes with Hong Kong, potentially boosting demand for the offshore yuan.
The People's Bank of China (PBOC) said in a statement that banks involved in offshore yuan clearing and settlement can tap liquidity from the onshore market, while urging clearing banks to come up with contingency plans to deal with liquidity risks.
The PBOC also said it would improve the currency conversion mechanism for the stock connect schemes to facilitate cross-border investment.
The Hong Kong Monetary Authority (HKMA), the city's de facto central bank, welcomed the PBOC's moves.
"As RMB (yuan) internationalization continues to progress and mutual access of capital markets between the two places further deepens, market demand for offshore RMB liquidity will increase," HKMA Chief executive Norman Chan said in a statement.
"We believe that the new measures will help ensure the offshore market to continue to function orderly and efficiently, and support Hong Kong's development as the global offshore RMB business hub."
Earlier this week, MSCI, the world's leading index publisher, said it would include 234 Chinese large cap stocks in its flagship emerging market index, with a partial inclusion factor of 5 percent initially. The inclusion will be completed in a two-stage process, in June and September.
The HKMA has been preparing for months to make sure there's enough liquidity in the offshore yuan market around inclusion days, which some expect can draw $17 billion of foreign inflows.
But some brokerages are still concerned they may not have access to adequate yuan liquidity to meet clients' needs.
The PBOC said on Friday that offshore RMB business clearing banks and participating banks would be permitted to conduct interbank market borrowing and bond repos in the mainland market.
Tapping onshore liquidity would help them develop their offshore yuan business, as well as duly implement PBOC's bilateral currency swap agreements, which serve as a backstop.
Meanwhile, the required reserve ratio (RRR) of the yuan deposits placed by Hong Kong's yuan business clearing bank in the settlement account in PBOC's Shenzhen Sub-branch is cut to zero percent, thus freeing up more liquidity.
In addition, foreign investors participating in stock connect schemes are allowed to conduct exchange transaction and forex hedging businesses via brokerages or settlement banks. (Reporting by Andrew Galbraith and Samuel Shen; Editing by Kim Coghill)