The World Bank is to issue bonds in China backed by the International Monetary Fund’s currency basket for the first time, in a move that aims to revive the market for such bonds and further China’s goal of internationalising the renminbi.

The bonds, to be sold into the mainland market, will be settled in renminbi, but will be backed by the IMF’s special drawing rights, a currency basket that the Chinese currency will join in October to sit alongside the dollar, euro, sterling and yen.

The renminbi’s addition to the SDR, whose composition is reviewed every five years, marks a milestone in China’s integration into the international monetary system as well as a sign of international support for Beijing’s efforts to liberalise its markets.

China’s domestic bond market is already the third largest in the world, but regulations that are only slowly easing have so far prevented many foreigners from tapping it. International investors also hold less than 2 per cent of the $7.4tn bonds outstanding, economists estimate.

SDR debt sold in renminbi will give domestic investors exposure to foreign currencies without having to get renminbi past China’s tight capital controls.

SDR bonds are not a popular market tool and efforts to develop a liquid market in the 1980s failed. However, China has been keen to boost use of SDRs in a bid to challenge the global dominance of the US dollar.

The dollar is used in 89 per cent of foreign exchange trades in London while the renminbi features in just 1.8 per cent, according to the Bank of England, which surveyed the UK market — the global forex centre — in April this year.

World Bank representatives will travel to Beijing and Shanghai next week to meet potential investors. The exact timing of any deal depends on market conditions, but debt specialists say China would probably want a deal done before it hosts the G20 meeting in Hangzhou early next month. The new issuance programme size is 2bn SDRs (approximately $2.8bn).

World Bank group president Jim Yong Kim called the bond programme a landmark development for China’s bond market and for the SDR as an international reserve asset.

“World Bank issuance of SDR bonds in China will support the G20’s objective of expanding the use of SDRs and help promote the development of China’s domestic capital market.”

The news comes a year after China’s unexpected 1.9 per cent devaluation of the renminbi sent global markets into a tailspin and left Beijing battling to contain capital outflows.

The Chinese currency’s increasing use in global trade is still considered a long-term trend but depreciation fears have weighed on investor interest in the short term, withdeposits held offshore in renminbi falling by a quarter over the past 12 months.
[Source: FT]