China will launch a pilot scheme linking the debt markets of Hong Kong and the Chinese mainland by the end of 2017. Dubbed “Bond Connect”, this is seen as another important step to open the capital market after the launching of the stock connect scheme.

The program will operate alongside the already existing Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect schemes that give investors access to each others’ markets. Analysts say it’s another important move to further open up China’s capital markets and attract foreign investment.

China’s bond market is the world’s third largest, with some 9.3 trillion US dollars of debt outstanding, and foreign investors hold less than two percent of Chinese debt. In 2016, China eased its approval process for foreign fund managers to buy Chinese bonds. The new bond connect signals the latest push to make China's bonds more accessible to offshore investors. But experts say China still needs to do more to regulate the market to boost trade volume.

Foreign investors have shown increasing demand for Chinese Yuan bonds as the Chinese currency has joined the SDR basket, and the Chinese mainland demand for Hong Kong bonds is also likely to be strong due to the yuan's depreciation pressure and a strong desire to diversify investments.

The bond connect program is an extension of Hong Kong’s existing stock links with Shanghai and Shenzhen. Experts believe it would further cement Hong Kong’s status as China’s major offshore yuan trading hub and financial center.