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China plans to introduce a bond trading link between Hong Kong and the mainland by year-end, according to premier Li Keqiang.

Dubbed “Bond Connect”, the programme would operate alongside the already existing Stock Connect system that allows international and mainland investors their only direct access to each others’ markets.

On Wednesday, Mr Li said: “We are preparing to implement for the first time this year a bond market connect between the mainland and Hong Kong, which is to say, we allowing for the first time overseas capital to to buy mainland bonds overseas.”

He added: “This will help Hong Kong maintain its status as an international financial centre, and provide Hong Kong investors with more options”.

The scheme has long been on the wish list of Charles Li, the energetic chief executive of the Hong Kong Stock Exchange, who is keen to position the exchange as the financial securities gateway between China and the outside world.

The premier’s blessing however takes the project to another level. It was a similar announcement from him that signalled the green light for the Stock Connect programme three years ago.

The move also signals another front in China’s ongoing efforts to attract international investors into its vast bond markets – the third largest in the world with some Rmb64tn ($9.3tn) of debt outstanding. Last year, China eased its approvals process for foreign fund managers to buy Chinese bonds and just last month it removed a stumbling block to them doing so by allowing them to hedge the currency risk of those purchases onshore.

Foreigners however still hold less than 2 per cent of Chinese debt. The significance of Bond Connect is that it would not require international investors to open accounts onshore, but rather allow them to trade mainland bonds from their Hong Kong accounts.

Charles Li has described Bond Connect as wanting to help overseas investors participate in the domestic inter-bank bond market.

He recently said of the link: “The aim is to provide cross-border cash bond trading and settlement connectivity with the Mainland’s major onshore bond market infrastructures. We are confident that we can deliver a unique value proposition to make existing markets connect better, without trying to reinvent the way that investors currently trade bonds.”

(Chart via Deutsche Bank.)

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