China's and Hong Kong's equity markets have been linked through a "Stock Connect" scheme that allows foreigners to access Chinese "A" shares through the Hong Kong exchange, and mainlanders to access Hong Kong shares through the Shanghai and Shenzhen exchanges.

Exchanges on the two sides have been working on a similar arrangement for bonds, as China looks for ways to further open its capital markets and attract foreign investment. China's restricted equity market ranks as one of the largest in the world by market cap and daily trading volume, while its bond market is the world's third biggest.

The linked market will also give Chinese investors, with limited investment channels, a chance to diversify their portfolios.

"This year, we are considering for the first time establishing a bond market connect between the Hong Kong and the mainland, allowing foreign capital to buy mainland bonds from overseas and Hong Kong will be the first to benefit from such an arrangement," Li said.

"This will help Hong Kong maintain its status as an international financial centre and provide Hong Kong residents more investment channels," he told a news conference at the close of the annual session of the National People's Congress, China's parliament.

He added that cooperation over the bond market was "what the country needs".

Hong Kong Exchange and Clearing Ltd (HKEX) welcomed Li's announcement, saying the Bond Connect is "a major breakthrough" in China's capital market development and further strengthens Hong Kong's role as a gateway between the mainland and international markets.

"HKEX is progressing with the preparatory work for Bond Connect under the guidance of the Mainland and Hong Kong authorities," the exchange said in a statement.

China has gradually opened its bond market to foreign investment and redoubled efforts to lure foreign capital, but investors have said market accessibility and concerns about the stability of the yuan currency - and capital controls enacted to protect it - could impede inflows.

Standard Chartered estimated that the value of outstanding onshore bonds may rise to 82 trillion yuan (9.7 trillion pounds) by the end of this year from 64.3 trillion as of end-2016.

By the end of last year, foreigners held a mere 870 billion yuan worth of bonds in the Chinese market, an increase of 83.4 billion yuan from the year before, the State Administration of Foreign Exchange said.

($1 = 6.9142 Chinese yuan)

(Reporting by Ryan Woo, Kevin Yao and Philip Wen; Writing by John Ruwitch in SHANGHAI; Editing by Simon Cameron-Moore and Jacqueline Wong)