HONG KONG • In another step to open up China's capital markets, Hong Kong and Chinese regulators formally approved a long-awaited scheme to connect China's US$9 trillion (S$12.5 trillion) bond market with overseas investors.

The Bond Connect programme has been in the works since Beijing launched a similar scheme connecting Hong Kong and Shanghai stock markets in 2014.

Overseas investors have other avenues to buy Chinese debt and currently hold just 2 per cent of onshore bonds, a relatively low level that reflects concerns about capital controls and the stability of the yuan that some say the connect scheme will do little to alleviate.

The Hong Kong Monetary Authority (HKMA) and the People's Bank of China (PBOC) announced their approval late on Tuesday, but provided few details about the plan, such as when the bond trading system would go into operation.

They said China Foreign Exchange Trade System (CFETS) & National Interbank Funding Centre, China Central Depository & Clearing and Shanghai Clearing House would be the main Chinese infrastructure providers for the scheme.

They will work with the Hong Kong Exchanges and Clearing (HKEX) and Central Moneymarkets Unit to establish mutual bond market access between Hong Kong and mainland China.

"It will provide a new channel for Hong Kong and international investors to invest in mainland China's bond market, which is the third-largest in the world and much undersold to global investors at the moment," said Mr Benjamin Hung, chief executive for Greater China & North Asia at Standard Chartered.

Initially, foreign and Hong Kong investors will be allowed to trade in China's interbank bond market, the so-called northbound trading link.

Investment will not be subject to quotas and the scheme will be rolled out in phases, the authorities said.

They did not indicate when northbound trading would begin or when Chinese investors would be able to trade in overseas bonds - the southbound route.

HKMA executive director Howard Lee said, however, that Bond Connect will offer investors a "new and convenient channel" with fewer technical hurdles than accessing the interbank bond market directly.

Investors would be able to buy Chinese bonds through their existing dealers in Hong Kong, without the hassle of having to set up accounts on the mainland, he said.

The launch of Bond Connect would likely accelerate when Chinese bonds are included in benchmark fixed-income indexes, Goldman Sachs analysts said in a market note yesterday.

REUTERS