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.