The Bond Connect programme is Beijing's latest attempt to open up its financial markets and attract foreign capital.
China's $9 trillion bond market is the third-largest in the world, but only 2% of Chinese bonds are foreign-owned.
The launch has been timed to coincide with the 20th anniversary of Hong Kong's handover to Chinese rule.
Bonds are glorified IOUs, typically sold by governments and companies to raise cash.
Their attraction to investors is that they usually offer a fixed rate of interest and come with the promise of eventual full repayment when the bond expires.
Initially, Chinese bonds can be bought by banks, insurers and fund managers via Hong Kong.
No date has been set for Chinese investment in foreign bonds.
HSBC Holdings and an asset management unit of Bank of China became the first institutions to trade using the scheme, with about $300m worth of bonds purchased in early trading.
Buying Chinese bonds - essentially Chinese government and corporate debt - will give investors greater access to investments denominated in the Chinese currency, the yuan or renminbi.
Overseas investors have in the past been cautious about entering the market - partly over the stability of the Chinese currency as well as Beijing's perceived lack of urgency to reform its financial markets.
There has also been long-held concern about the credibility of credit ratings for bonds in China.
Similar systems to enable dealing in Chinese shares have been rolled out recently.
Since late last year, foreign investors in Hong Kong have been able to trade shares in about 900 firms in companies on the Shenzhen Stock Exchange and vice-versa following the official launch of the Shenzhen-Hong Kong trading link.
That link followed the launch of the Shanghai-Hong Kong Stock Connect in November 2014, which allowed international investors to trade in hundreds of Shanghai-listed A-shares as well as Hong Kong stocks.