Chinese Premier Li Keqiang recently said for the second time that the central government is planning to pilot a bond trading link with Hong Kong this year after the appointment of Carrie Lam as the SAR's chief executive.

The Bond Market Connect with Hong Kong, following the Shenzhen-Hong Kong Stock Connect and the Shanghai-Hong Kong Stock Connect, is a further step in opening up China's financial market to overseas capital, and is also conducive to the internationalization of RMB.

Foreign investment scale

The Bond Market Connect will allow foreign investors to invest in domestic RMB bonds outside the Chinese mainland, greatly increasing the scale of potential foreign investment.

China's bond market ranked third worldwide in 2016, reaching 63.7 trillion yuan (9.3 trillion US dollars) by the end of the year.

However, the number of foreign institutional investors accounted for just 2.89 percent of participants in the interbank market, and their trusteed bonds occupied less than two percent, as of February 2017.

Bonds in RMB are attractive to international investors, as they can get RMB financing by using the bonds as collateral and some can issue over-the-counter derivatives on the basis of the RMB bonds.

Internationalization of RMB

For China, the Bond Market Connect will promote internationalization of RMB, said Professor Raymond So, from Hong Kong Baptist University.

Professor So noted the international currency should have three functions, namely payment, investment and reserve. RMB has met the functions of payment and investment through China's international trade and the "Stock Connect" with Hong Kong.

The RMB bonds can become foreign exchange reserves for other countries via the Bond Market Connect, added Professor So.