August lift-off: China set for Special Drawing Rights bond issues, report says
But traders and economists question value of such bonds, saying technical problems must be solved
China might take another big step forward this month in its long-term aim to forge an IMF money system into the world’s dominant currency.
Mainland media group Caixin reported that the World Bank planned to issue bonds denominated in Special Drawing Rights in China as early as the end of this month. It said policy bank China Development Bank was also planning an SDR bond issue.
The SDR is a unit of money created by the International Monetary Fund and defined by a weighted average of various convertible currencies.
Market traders questioned the real purpose of such bonds, saying the SDR had little use in investment and trade.
China has long had an obsession with the IMF’s SDR and wants to reduce the global reliance on the US dollar.
The IMF agreed last November to add the yuan to its SDR basket of currencies and offered the weighting as the third-biggest in the group, which Beijing saw as a triumph in its push for the yuan to have greater global influence.
But the yuan later came under heavy depreciation pressure amid massive capital outflows – raising doubts about its credibility as a global currency.
Beijing then began to publish its foreign exchange reserves, overseas investment and payments denominated in SDR.
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Central bank governor Zhou Xiaochuan said in April that the People’s Bank of China was studying the feasibility of issuing SDR bonds in China.
If the World Bank issue went ahead, it would be one month before the yuan was formally included in the currency basket.
Bank of China researcher Zhao Xueqing said the timing was “proper” because the IMF was looking for ways to expand the use of the monetary unit.
However, one Shanghai-based trader at a major bank said the issue would be “more symbolic than meaningful”.
Who will buy them? How will they be priced and transacted?
“It’s more like China wanting to show it has a big role in the global financial market,” she said. “But who will buy them? How will they be priced and transacted? ... Even yuan-denominated bonds issued by foreign institutions are not actively traded.”
Ding Zhijie, a finance professor at the University of International Business and Economics in Beijing, said SDR bond issues first needed to address a set of technical problems.
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Ding said the SDR did not have a yield curve and carried only three-month interest rates – suggesting it lacked a benchmark to price the bonds. The negative interest rate environment globally might also limit their attraction.
If such bonds were worth investing in, why hasn’t there been any active issues or transactions in much more mature countries before
An in-house economist at a Shenzhen-based domestic bank said:“I doubt there is any meaningful use to the issuing of such bonds. If such bonds were worth investing in, why hasn’t there been any active issues or transactions in much more mature countries before?”
Three other bond traders at smaller banks on the mainland said they were not very interested in investing in the bonds.
“It is probably for the biggest state banks to hold the bonds in response to an administrative request, but we prefer to hold liquid assets in our own portfolio,” one trader in Fujian province said.
The World Bank declined to comment about the SDR bond issue.
