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China set to welcome first SDR bonds since 1980s amid yuan push

Thursday, July 28, 2016 - 16:04
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China is set to welcome the issuance of bonds linked to the International Monetary Fund's Special Drawing Rights, the world's first in three decades, as the nation supports the growing global role of the yuan ahead of its official inclusion in the basket of reserve currencies in October.

[HONG KONG] China is set to welcome the issuance of bonds linked to the International Monetary Fund's Special Drawing Rights, the world's first in three decades, as the nation supports the growing global role of the yuan ahead of its official inclusion in the basket of reserve currencies in October.

The World Bank is planning to issue a bond of up to 500 million SDR units (US$692.5 million) in China's interbank market, people familiar with the matter said Thursday. China Development Bank Corp and Industrial & Commercial Bank of China Asia Ltd are also planning to sell SDR-denominated notes, people familiar with the offerings said this week.

Any new SDR-denominated bond issuance would be the first since the 1980s, according to the IMF.

"China is trying to sell the renminbi idea to the whole world," said Zhou Hao, an economist at Commerzbank AG.

"With the yuan in the SDR basket, the more SDR bond issuance there is, the more acceptance there will be of the yuan as a global currency. It would be easier for international organisations to hedge against currency risks by selling SDR rather than plain yuan bonds, since SDR contains a basket of currencies."

More such organisations will likely follow with their own offerings in China, Mr Zhou added.

The Chinese government has been promoting greater international usage of the yuan, also known as the renminbi, and the IMF in 2015 decided that it would form part of the SDR from Oct 1 this year.

The People's Bank of China is also studying the possibility of SDR bond issuance, according to a statement this month from the central bank.

"It shows China's active role in promoting usage of SDR," said Liu Dongliang, a senior analyst at China Merchants Bank Co in Shenzhen.

The World Bank's sale may have a tenor of three years and the issuance may take place as soon as next month, before the G20 conference to be held in early September, the people familiar said Thursday.

ICBC Asia's bond will be no more than 100 million SDR units, one of the people said Thursday.

Representatives at the World Bank in Washington didn't immediately respond to e-mails sent after normal business hours requesting comment on the financing.

China Development Bank didn't respond to a fax seeking comment. An ICBC spokesman in Beijing at ICBC Asia's parent company declined to comment.

"While a nascent market for SDR-denominated bonds began in the early 1980s, it did not develop and remained very small relative to global bond issuance," according to a paper posted to the website of Bank of International Settlements in 2011.

Sweden was one issuer to make use of the market, selling an SDR-denominated "credit" in 1981, a move that was followed by several other borrowers, according to the paper by George Hoguet and Solomon Tadesse titled "The Role of SDR-denominated Securities in Official and Private Portfolios."

SDR bonds are likely to suffer from a lack of liquidity, according to Jukka Pihlman, head of central banks and sovereign wealth funds in Singapore at Standard Chartered Plc.

It's unlikely central banks and sovereign wealth funds will have significant demand for such bonds, at least not initially, Mr Pihlman said.

BLOOMBERG

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