World Bank 'planning SDR bonds in China'

This comes after IMF agrees to add yuan to basket of reserve currencies

WASHINGTON • The World Bank is planning to sell bonds in China denominated in the International Monetary Fund's (IMF) Special Drawing Rights or SDR, people familiar with the matter said.

The offering would be in China's interbank note market, according to the people, who asked not to be identified. Issuance of the securities may be as soon as next month, one of the people said.

They would be the first in SDR from the lender, according to data compiled by Bloomberg.

President Xi Jinping's efforts to promote the yuan's international usage culminated last year when the IMF agreed to add it to its benchmark basket of reserve currencies, making it part of the SDR, effective from Oct 1 this year.

The People's Bank of China (PBOC) is studying the possibility of SDR bond issuance, governor Zhou Xiaochuan was cited as saying in a central bank statement.

While the yuan performed better than some of its major peers from 2011 through late last year, its relative value has fallen since then against the traditional haven currencies as market volatility increased, according to a study published last week.

Mr Zhou had said earlier this year that Chinese officials want to gradually increase use of the funding tool.

A representative for the World Bank did not immediately respond to an e-mail after business hours requesting comment.

The bond offering comes as a new report distributed by the Federal Reserve is casting doubt on the ability of China's renminbi or yuan to achieve haven status for investors.

While the yuan performed better than some of its major peers from 2011 through late last year, its relative value has fallen since then against the traditional haven currencies as market volatility increased, according to a study published last week.

This year, it has declined 2.8 per cent, taking a toll on the currency's global appeal amid concern about the strength of economic growth and uncertainty about the PBOC's commitment to letting the currency trade more freely.

The report tested the relationship between a gauge of stock- market price swings and the value of the yuan against the US dollar, yen, euro, the British pound and the Swiss franc, currencies perceived as safe exchange rates because their value rises relative to others during uncertainty.

China's central bank kept the yuan from slipping past 6.7 per US dollar last week by strengthening its reference rate, which limits onshore moves to 2 per cent on either side.

"Overall, our findings do not support the suggestion that the renminbi is currently a safe haven currency and in that sense question the notion that the renminbi is progressing towards safe haven currency status," Professor Rasmus Fatum and Assistant Prof Zhu Guozhong of the University of Alberta and Hitotsubashi University's Associate Prof Yohei Yamamoto wrote in the report, published by the Federal Reserve Bank of Dallas, using the official name for the yuan.

The PBOC did not respond to a request for comment on the report.

Transparent government institutions, predictable policies and liquid markets help make a country's currency a haven destination for investors during times of market turbulence, all areas where China has sometimes struggled.

"Just because you're a reserve currency doesn't mean you have the status of a safe haven," Mr Win Thin, Brown Brothers Harriman's head of emerging-market currency strategy in New York, said by phone last Thursday.

"There is not enough confidence in China, its institutions don't have a reliable track record and even though the IMF recognised that China is a growing player in the world economy, the yuan has a long way to go before it can be viewed as safe."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on July 26, 2016, with the headline 'World Bank 'planning SDR bonds in China''. Print Edition | Subscribe