The Daily Update - World Bank SDR bond

The World Bank today issued the first ever Special Drawing Rights (SDR) bond via the China Interbank Bond Market (CIBM). The AAA rated 3-year SDR 500m (USD 700m) note underwritten by the International Bank for Reconstruction and Development (IBRD) will settle in renminbi (RMB) on September 2.

Initial price guidance was set at a yield of 0.4-0.7%, so more attractive than the likes of AAA rated 3-year Bunds yielding negative 0.65%. Using our proprietary Relative Value Model and workings using the SDR currency weightings, in terms of “fair value” the initial yield guidance at the high-end of 0.7% looked about right.

The Daily Update - IMF Cautiously Optimistic on China

"Cautiously optimistic" still seems to be the overall position of the latest IMF review on the Chinese economy and its reform towards a sustainable growth path. Typically annually, the IMF holds bilateral discussions with its members under Article IV and last Friday they published this 123 page report covering reforms, concerns, expectations and suggestions - summarising the ongoing top-level dialogue and three and a half week intense discussions that took place during May-June.

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.'

Wealthy Nations Daily Update - EM Policymakers

Olivier Blanchard’s latest publication resonates more with emerging market policymakers than standard models; expounding on evidence that capital inflows and currency appreciation can often boost output.

Since retiring as Chief Economist of the International Monetary Fund last month, the esteemed Olivier Blanchard is not expected to fall into obscurity. Now a senior fellow at the Peterson Institute for International Economics (PIIE), an ever more influential Washington think tank, he will now be able, “to sit down and take the time” to focus on honed research which he had, “too little time” to accomplish during his 8 years of firefighting at the IMF, which he joined the month Lehman Brothers went bankrupt.

Wealthy Nations Daily Update - China SDR

As we have expected for some time, the renminbi (RMB) is now odds on favourite to be the next member of the IMF SDR basket. We believe the decision was, unofficially, made months ago and the delay to the vote was indeed just to allow time for the Chinese to put the required criteria in place.

The fact that the IMF delayed their decision until the end of this month, when the board of members vote, has also given members time to air their support, i.e. the UK, US and Europe. Japan has some domestic issues to resolve while they are in their second recession since Abenomics and his quiver full of economic arrows. We look for RMB inclusion as soon as September next year, effective 1st October.

Wealthy Nations Daily Update - Canada/China/SDR

Firstly, our condolences go out to all those affected by the terror attacks in Paris on Friday evening. Our thoughts are with you all.

In September of this year China eclipsed Canada to become the U.S.’s biggest trading partner for the first time in history. Trade between the U.S. and China hit USD 442 bln in the first nine months of the year while U.S.-Canada trade totalled USD 438 bln, according to U.S. government data. The main reason for the reversal is the drop in crude oil, now half what it was in 2014, which equates to a 32 per cent drop in the value of Canada's trade in energy products in September alone compared to the previous year. However this is not to dismiss the meteoric rise in trade between the economic superpowers since the mid 1980s. Since 1985, trade between the US and China has ballooned over 7,500%. Indeed globally China now accounts for about 15% of global GDP, however its contribution to global growth last year was in the region of 40%, one of the reasons economic leaders take such a close interest in the health of the Chinese economy.

Wealthy Nations Daily Update - Renminbi / Swift

The Chinese renminbi is now the 4th most active global payment currency according to yesterday’s SWIFT report titled, “Renminbi's Stellar Ascension: Are You On Top Of It?” The renminbi, reaching a record high of 2.79% of global payments, overtook the yen by a slim margin of 0.03%. The US dollar, euro and sterling still dominate the top 3 positions accounting for 44.8%,27.2% and 8.5% respectively so the renminbi is expected to hold around this position for a while having jumped 3 positions in the past year and another 5 in the 12 months prior to that. Following this trend it is certainly conceivable for the renminbi to overtake sterling around 2020 and catch-up with the euro within a decade.

Wealthy Nations Daily Update - China SDR

The article in yesterday’s FT was a good assessment of where China stands in its campaign to achieve reserve currency status for the renminbi (RMB). Of particular note is that the US has given conditional support for inclusion of the RMB in the SDR basket, with the conditions merely being that the currency meets the technical requirements.

The article correctly states that the essence of the technical issues is whether central banks around the world can get access to RMB in a timely and relatively costless manner. In simple terms, the point of the Special Drawing Rights (SDR) basket is for central banks to be able to access 'hard' currencies in times of stress. Think of emerging countries that need to have ready access to US dollars, or another of the hard currencies, so domestic companies can pay their debts. The SDR serves the same purpose, except that it is broader and includes currencies, namely the US dollar, Japanese yen, euro and sterling, which are freely exchangeable amongst themselves at minimal cost.

Wealthy Nations Daily Update - G20

Over the weekend the financial leaders from the world’s 20 biggest economies (G20) met in Ankara, Turkey for the third time to exchange views on the recent global economic events, as well as discuss actions required to achieve the ambitions for the group over the coming year. At the last summit the leaders agreed to boost global output over the next 5 years by 2% above what was already expected through coordinated reforms and investment. They acknowledged that ultra-low interest rates alone would not be enough to accelerate economic expansion globally and agreed to step up reforms in an effort to boost slowing growth to achieve this goal.

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