On Aug 31, the World Bank for the first time issued a bond denominated in Special Drawing Rights in China. The debt was issued in China’s interbank bond market, and marks an additional step in the internationalization of the Chinese currency. The renminbi is to join the World Bank’s SDR basket of currencies in October.
The World Bank has set an indicated yield range for the three-year bonds at between 0.4 and 0.7 percent annually. The value of the SDR notes is based on a basket of international currencies — the US dollar, the euro, the British pound, and the Japanese yen. The Chinese RMB will be included starting this October and will then help determine the value of the bonds. The bond purchases will be settled in yuan. This is the first SDR bond issued anywhere in 35 years.
“The first significance is that now we have an SDR-denominated bond that includes the RMB. The fact that it’s issued anywhere is important because the RMB will help determine the pricing of this bond. The second significance is that this bond is issued within China, so in terms of balancing your fixing income portfolio, traditionally that’s going to be in RMB, but now you can have a bond that’s also denominated in dollar, in pound and in yen, and also in RMB. So by holding this bond, you get more exposure to the international currency market, and certainly you can diversify your bond portfolio better, in terms of currency risks,” said Qian Jun, a professor at the Shanghai Advanced Institute of Finance.
China’s central bank has approved the World Bank’s issue of a total of 2 billion yuan worth of SDR bonds in China. If the first float goes well, other issues will follow.
“What we expect is that such issuances will be more common. Although if you look at this particular piece, it’s small, but when you put them together, and the fact that there will be more and more such bonds issued, and their importance will grow, and will make RMB a true member of the global investing currency, and RMB-denominated assets will become a bigger part of global investors,” Qian said.
The bond is named the Mulan Bond, after the Disney character. The World Bank says the RMB will have a 10.92 percent weighting in the SDR basket, greater than the proportion granted to the British pound or the Japanese yen.