New is­sue a land­mark for Spe­cial Draw­ing Rights

China Daily (USA) - - ECONOMY - By WANG YANFEI in Hangzhou

The is­suance of bonds de­nom­i­nated in Spe­cial Draw­ing Rights for the first time in China is a good start­ing point for pro­mot­ing the ex­pan­sion of SDR use among the G20 mem­bers, an­a­lysts said.

The SDR-de­nom­i­nated bonds to be set­tled in ren­minbi, which the World Bank be­gan is­su­ing on Wed­nes­day, are “a land­mark move” for China’s bond mar­ket and for the SDR as an in­ter­na­tional re­serve as­set, ac­cord­ing to World Bank Pres­i­dent Jim Yong Kim.

He said the World Bank’s is­suance of SDR bonds in China will sup­port the G20’s ob­jec­tive of ex­pand­ing the use of the SDR, which has been listed as one of the G20’s key fi­nan­cial tasks by the G20 In­ter­na­tional Fi­nan­cial Ar­chi­tec­ture Work­ing Group.

SDR-de­nom­i­nated bonds first ap­peared in 1975. By the end of 1981, a to­tal of 563 mil­lion units (then val­ued around $661 mil­lion) of SDR bonds had been is­sued. How­ever, no SDR-de­nom­i­nated bonds or credit prod­ucts were is­sued there­after, ac­cord­ing to the In­ter­na­tional Mon­e­tary Fund.

The change came in 2009 af­ter China un­der­lined the need to strengthen the us­age of the SDR bas­ket, and later be­came part of the out­comes of the G20 meet­ings in Lon­don that year.

An­a­lysts be­lieve that the is­suance of bonds af­ter 35 years and the fu­ture devel­op­ment of the SDR-de­nom­i­nated bond mar­ket in China will help pro­mote greater use of the SDR and meet some of grow­ing de­mand for ren­minbi-de­nom­i­nated as­sets.

Liang Hong, chief econ­o­mist with China In­ter­na­tional Cap­i­tal Cor­po­ra­tion, said such bonds are a new op­tion for both do­mes­tic and for­eign in­vestors who are look­ing for ways to di­ver­sify their in­vest­ments.

“In­vestors could turn to SDR-de­nom­i­nated bonds con­sid­er­ing their ad­van­tage in min­i­miz­ing cur­rency fluc­tu­a­tion risks,” she said.

Echo­ing her state­ment, Li Chao, chief econ­o­mist with Bei­jing-based Hu­atai Se­cu­ri­ties Co Ltd, said the devel­op­ment of the SDR de­nom­i­nated bond mar­ket in China would help re­bal­ance the world mon­e­tary sys­tem and in­crease the ap­peal of the SDR in the fu­ture, as more fi­nan­cial in­sti­tu­tions are ex­pected to fol­low the World Bank’s lead and is­sue such bonds.

In the mean­time, more ef­forts to at­tract pri­vate in­vestors are needed, ac­cord­ing to Zhao Xue­qing, an econ­o­mist with the In­sti­tute of In­ter­na­tional Fi­nance, a think tank un­der the Bank of China.

“Both top-down and bot­tom-ap­proaches are needed,” said Zhao.

She sug­gested that more par­tic­i­pa­tion by gov­ern­ment backed agen­cies, liq­uid­ity sup­port and eased en­try are needed to at­tract pri­vate in­vestors, while is­suers will “have to re­solve is­sues such as pric­ing schemes and risk man­age­ment”.

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