World Bank backs China’s push to challenge US dollar dominance by selling SDR bonds ahead of G20 summit
World Bank vice-president says more Special Drawing Rights-denominated bonds may be issued after debut sale this week
China and the World Bank drew inspiration from a legendary woman warrior in the latest push for diversification as the yuan challenges the US dollar as the globe’s dominant currency.
The so-called Mulan market was created on Wednesday when the World Bank issued US$700 million worth of bonds denominated in 500 million Special Drawing Rights units.
Special Drawing Rights are an accounting unit created by the International Monetary Fund as a form of international money.
SDR-denominated bonds in the late 1970s and early 1980s went nowhere, but hopes are higher this time given they have the blessing of Beijing and China’s onshore bond market.
Beijing’s SDR ambitions were outlined in 2009 in an article by central bank governor Zhou Xiaochuan who argued that SDRs could be used to develop a super-sovereign currency to replace the greenback in the global financial system.
The debut of the bonds on Wednesday came just days ahead of a Group of 20 summit in Hangzhou, eastern Zhejiang province, where the world’s major economies are likely to endorse a proposal to widen SDR use.
World Bank vice-president and treasurer Arunma Oteh said in an interview with the South China Morning Post that more could follow.
“We had a number of issuers consult us on some of what we’ve done to issue in this market. There will be other issuers who have the interest to do the same,” she said.
Oteh said the SDR was a “very important currency” and SDR bonds could provide “a natural hedge” for countries that hold SDR currencies in their reserves.
The issue, part of a 2 billion SDR unit bond sale granted by the People’s Bank of China, will be settled in yuan.
“First and foremost, China is the third-largest capital market only after the United States and Japan,” Oteh said, adding that it was one of the bank’s roles to develop the capital market.
The World Bank said in a statement the bonds were 2½ times oversubscribed with about 50 orders. Investors included policy lenders such as the Export-Import Bank of China plus big state-owned banks and brokerages including China International Capital Corporation.
Foreign banks have also placed orders, including the Bank of Tokyo-Mitsubish UFJ (China) and Citibank (China).
“We are honoured to support China in its efforts to internationalise its capital and currency markets through the launching of an SDR bond issue and the new Mulan market,” Oteh was quoted as saying in the statement.
Jiuzhou Securities chief economist Deng Haiqing said the World Bank’s SDR bond issuance in China was significant in terms of Beijing’s drive to boost the yuan’s global profile, but the Mulan bond market had a basic weakness: “limited market recognition”.
The adjustment of the SDR currency basket every five years would also add uncertainties to some SDR bonds, he said.
The yuan will officially become a component currency in the basket calculating the value of the SDR, offering the yuan nominal international reserve currency status along with the US dollar, the euro, the pound and yen.
The three-year SDR bonds issued on Wednesday carried a coupon rate of 0.49 per cent, the bank said in the statement. It was close to the lower bound of the range, 0.4-0.7 per cent, guided by the World Bank.
Oteh said the funds raised from the SDR bond issue would go into the pool for future investment projects.
“We don’t target specifically funding for specifically lending,” she said. “The World Bank swaps the funds to currencies either we invest or we lend. We don’t take interest rate risks or exchange rate risks, but we take huge credit risks.”