By Umesh Desai and Andrew Galbraith
HONG KONG/SHANGHAI (Reuters) - China and Hong Kong launched a long-awaited "Bond Connect" scheme on Monday that links China's $9 trillion bond market with overseas investors, the latest step in Beijing's efforts to liberalize and strengthen the country's capital markets.
The early signs bode well for building an active debt market, with more than 2 billion yuan ($295 million) of bonds purchased in the first 22 minutes of brisk trade.
HSBC Holdings and an asset management unit of Bank of China were the among the first to complete trades using the scheme.
The launch of the connection was timed to coincide with the 20th anniversary of Hong Kong's handover to Chinese rule and trading will initially commence "northbound", meaning foreign investors will be able to buy and sell Chinese bonds.
No launch date has been set for the southbound channel.
"We continue to hold the view that there could be more than $1 trillion of additional global fixed income investments to be allocated to China domestic bonds over the coming decade," a note from Goldman Sachs said on Monday.
In line with broader foreign access rules, overseas investors including pension funds, central banks and sovereign wealth funds will be eligible to trade sovereign and local government bonds, policy bank bonds and corporate debt on the Bond Connect.
The connection will increase the supply of yuan-denominated assets that can be held by global investors as Beijing steps up the internationalization of its currency.
"Bond Connect will clearly make it easier for investors to access the Chinese bond market, which in turn makes it easier for investors to hold renminbi," Andy Seaman, chief investment officer of London-based Stratton Street, said in a note.
A giant screen at the launch ceremony showed 2.15 billion yuan worth of bonds were purchased in the first 22 minutes of trade.
Chinese regulators formally approved the bond connect scheme in May. International investors have been allowed direct access to the China interbank bond market since last year and some market participants have questioned the need for an additional trading scheme.
Overseas investors have been reluctant to enter the market amid fears over the stability of the Chinese yuan, and over potential delays to Beijing's reforms of the capital markets.
China has been keen to increase foreign participation in its bond market, the world's' third-largest, where overseas holdings were less than 2 percent. This is below the international norm of about 10 percent, BNP Paribas said.
BOCHK Asset Management said it had bought Chinese government and corporate bonds, conducted yuan spot trades related to these deals, and subscribed to a primary bond market issuance by Agricultural Development Bank of China. HSBC said it had completed its first deal as a market maker through the link but did not give additional details.
Media reports said 20 market makers for the bond connect scheme had been approved, including 14 Chinese and six overseas institutions.
BNP Paribas said it had received approval as a market maker and had also executed its first trade under the scheme.
The scheme will also see deals coming through the primary market. China Development Bank said it planned to issue up to 20 billion yuan ($2.95 billion) of one-year, three-year and 10-year fixed-rate bonds for tender on Monday. HSBC said it is one of the underwriters.
Hong Kong's new leader, Carrie Lam, attended the debut ceremony and said the connect scheme marked "another new chapter in the development of mutual capital markets access between the mainland and Hong Kong."
HKEx chief executive Charles Li said demand for a southbound channel was limited, meaning the bond connect scheme will only allow investors to initially trade northwards.
The bond program follows the launch of the Hong Kong and Shanghai stock connect scheme in November 2014 and the Hong Kong and Shenzhen stock program in December 2016. Those two schemes allow both northbound and southbound trade.
(This story has been refiled to correct typographical error in headline)
(Reporting by Umesh Desai, Donny Kwok and Andrew Galbraith, Editing by Anne Marie Roantree & Shri Navaratnam)