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HONG KONG (Reuters) - The central banks of China and Hong Kong on Sunday said non-mainland investors can start trading Chinese corporate bonds in a trial beginning on Monday, confirming a calendar entry that appeared on the "Bond Connect" programme website late on Friday.
Trading will initially be "Northbound", so mainland investors will be not yet be able to buy and sell Hong Kong-listed debt.
The announcement coincides with the 20th anniversary of the resumption of Chinese rule in Hong Kong, and marks China's latest measure to open up its capital markets. The Bond Connect follows similar stock-trading programmes between the Shanghai and Shenzhen stock exchanges and their Hong Kong counterpart.
Standard Chartered's John Tan, head of financial markets for Greater China and north Asia, said China's $9 trillion bond market is the world's third-largest yet is relatively undersold to foreign investors.
"The launch of the Bond Connect marks the strong commitment of the Chinese government to further open up its markets," Tan said in emailed comments. "We are positive that the scheme will be well-received by the market and report good momentum when it is launched."
The Bond Connect means more global debt indices will include Chinese bonds in the foreseeable future, Tan said.
To mark the launch of Bond Connect, the China Development Bank said it planned to issue up to 20 billion yuan ($2.95 billion) worth of one-year, three-year and 10-year fixed-rate bonds for tender beginning on Monday.
In a joint statement on Sunday, the People's Bank of China and Hong Kong Monetary Authority said they have agreed the principles of cross-boundary supervisory cooperation.
"For Northbound trading, the relevant regulations, policies and operational and supervisory arrangements have been finalised, technical systems are ready, and market promotion as well as on-boarding are both under way," they said.
Xie Xiaoli, head of international business at Ping An Asset Management, said the Bond Connect increases the convenience of investing in China's bond market, and it will be a gradual process for foreign capital to flow into China's bond market.
"At the moment, the size of foreign investors' investment in domestic bond market is about 830 billion yuan, accounting for less than 2 percent of market share," Xie said. The low proportion indicates high growth potential, she said.
"Our initial estimation of the capital increase is about $250 billion once the China bond market is incorporated into global bond indices," Xie said.
Access to China's bond market through the programme will be restricted to overseas institutional investors such as banks, insurers, brokerages and investment funds. Trades will not be subject to quotas.
The central banks have not indicated when Chinese investors will be able to trade Hong Kong-listed bonds, known as "Southbound" trading.
($1 = 6.7793 Chinese yuan renminbi)
Reporting by Donny Kwok; Editing by Nick Macfie and Christopher Cushing