On August 31, in what was dubbed a "historic event", the World Bank became the first issuer of bonds denominated in SDR and settled in yuan when it sold 500 million SDR units worth of bonds in China. Then, overnight, in yet another historic event, Standard Chartered Bank (Hong Kong) said on Friday that it has obtained approval from the People’s Bank of China to be the first commercial issuer of bonds denominated in Special Drawing Rights (SDRs) in China’s interbank bond market.
According to Reuters the size of the issuance programme is 100 million SDRs – approximately 925 million yuan, or $139 million – and the bonds will be settled in yuan.
A successful offering would mark the first ever time a commercial issuer has issued securities have been issued in the synthetic reserve currency in 35 years.
“SDR bonds, to be settled in RMB, will help promote SDR financial instruments, provide a channel for investors to invest in foreign currency bonds in the onshore market, and offer more diversified bond products in the market,” said Standard Chartered Bank China’s head of financial markets Wesley Yang quoted by SCMP.
Saving money on underwriting costs, Standard Chartered Bank (China) will act as joint lead underwriter on the company's own offering and joint lead bookrunner to arrange roadshows in Beijing and Shanghai.
China has been promoting the International Monetary Fund's SDR as an alternative to the US dollar, and has made the alternative reserve currency a key focus of its push to internationalise the renminbi.
“The SDR bond is a step in offering a fixed income product that captures multi currency exposure for Chinese investors ... but at this stage I think it’s more symbolic than anything else,” said Brett McGonegal, chief executive of capital link international.
“The impact of the bond is very small as the size is tiny in comparison to US dollar denominated bonds and the secondary market for SDR bonds is non existent since this is the first of its kind issued in over 30 years.”
According to SCMP, the development of a secondary market for SDR bonds will be pivotal, due to the need for a mechanism to value the bond after it has been purchased from the underwriter, as well as in enabling greater institutional involvement.
“Until we see how the secondary market forms we will not be able to judge the success and value of the bond,” said McGonegal. "The dim sum market proved to the world that those bonds were only retail in nature and offered no real secondary market thus forcing purchasers to hold until maturity. This was a great trade when the yuan was appreciating but turned into a disaster when it started to fall."
And now that an alternative issuance currency is needed, the IMF's SDR will be happy to step in those shoes, or at least try, as it attempts to become, at first tentatively, to become a new global currency, one which - however - will need a lot of support from an establishment funded in the US currency to displace the greenback as the world's reserve currency, especially since it remains unclear how China feels about floating the Yuan and making it a truly international, and thus competitive, currency.