In one of the most closely followed bond issues in recent history, overnight the International Bank for Reconstruction and Development (IBRD), one of the five member-institutions of the World Bank Group, sold 500 million SDR-denominated three-year bonds carrying a coupon of 0.49% at an auction in China’s interbank market on Wednesday. This was the first SDR denominated offering in three decades, with the issuance symbolically taking place in Shanghai one month before the official inclusion of China’s currency in the SDR basket.
While some have speculated that the offering is a test toward internationalizing the SDR as a global reserve currency and putting the IMF at the forefront of a post-globalized world, with notable implications for the fate of the US Dollar as the global reserve, for now the consequences are more mundane: the SDR bonds that settle in RMB give Chinese domestic investors the option of getting exposure to different currency assets without investing overseas, says Ju Wang, a senior FX strategist at HSBC. According to PBOC deputy governor Pan Gongsheng the issuance of the SDR-denominated bond will help boost the stability of the international currency system. Pan said the SDR bonds will help investors avoid exchange-rate risks and are a good way of making the reserve currency a more a market-oriented pricing tool. The PBOC will work with IMF to further expand the use of the SDR, he said.
The first issuance in China of bonds denominated in Special Drawing Rights was well received, Gongsheng added, as he pledged to expand the use of the International Monetary Fund’s reserve currency. Speaking at a press conference, Pan, who is also head of China’s foreign exchange regulator, said the bid to cover ratio was 2.5 with around 50 institutional investors bidding for the bonds, including domestic banks, brokerages, insurance companies and overseas central banks as well as international organizations and overseas financial institutions. Chinese government bond auctions typically have a bid to cover ratio of around 3.
The bonds, which will be settled in yuan, were the first batch of a planned 2 billion SDR issue that the IBRD has won approval to sell in the interbank market.
China will also further open up the domestic financial market to foreign investors, which will increase their access to yuan denominated assets.
While the SDR issuance may lead to greater global adoption of the Chinese currency as an initial step, the Yuan will remain a risky currency from the perspective of investors despite its inclusion in IMF’s basket of reserve currencies, Market News International reports, citing Guan Tao, a former SAFE official. “The yuan is a peripheral currency and a risky currency, not a safe-haven currency,” Guan is cited as saying in an interview.
Others were more optimistic, with HSBC saying the issuance will provide diversification in domestic investments for foreign investors who are accessing the Chinese market, but still buying government bonds or policy bank notes, Candy Ho, global head of RMB business development for global markets, says at a press conference today. HSBC expects potential pickup in interbank bond market activity following the Special Drawings Rights issuance, while the SDR issuance and RMB inclusion into SDR will bring inflows from central banks and other foreign institutions.
As to the fate of the SDR – or the Yuan – as a global exchange currency, the jury is still out.
via http://ift.tt/2bRPA3e Tyler Durden