The Daily Update - SDR denominated debt on China's CIBM

Last week the World Bank became the first entity to receive approval to issue Special Drawing Rights (SDR) denominated notes via the China Interbank Bond Market (CIBM). Underwritten by the International Bank for Reconstruction and Development (IBRD) the issuance program is to total SDR 2bn (~USD 2.8bn); denominated in SDR and settled in renminbi (RMB). The first issue is said to be no longer than three years, ~SDR500m (RMB4.6bn) and is expected before the October 1, depending on market conditions. In a statement, the World Bank Group President Jim Yong Kim commented on the 'landmark development for China’s bond market and for the SDR as an international reserve asset,' adding that the World bank is 'pleased to support China’s growing role in global financial markets.'

Historically, the SDR currency has only been used by the IMF and member states as a reserve asset. Private SDR denominated securities were initially issued back in the mid-70s, with Sweden issuing its first SDR denominated credit in 1981 but the market never really took-off due to investor scepticism. So this announcement is a huge step for China, and as Kim said, the issuance of the 'World Bank SDR bonds in China will support the G-20’s objective of expanding the use of SDRs and help promote the development of China’s domestic capital market.'

We expect further international institutions to seek approval to issue debt denominated in SDR via the CIMB. In fact there has been chatter that China Development Bank is looking to issue anywhere between USD300-800m of SDR bonds. The PBoC Deputy Governor Yi Gang also mentioned on Monday that a batch of SDR bonds will be issued on the CIBM before the G-20 Summit next month. He discussed the demand from financial institutions and 'other international institutions” for SDR bonds on the CIMB adding that the central bank will 'continue to develop the infrastructure' of the onshore bond market in preparation for “further issuance of such bonds and the liquidity of secondary markets.'

In a dollar denominated world, access to SDR denominated securities on the CIBM would allow international investors the option to diversify away and obtain access to China’s massive bond market, while on the flip side these notes would give China’s onshore investors exposure to a basket of currencies. Who knows, maybe the SDR will become the world’s next global currency.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.