Tuesday, November 1, 2016

Standard Chartered Becomes Frst Commercial Issuer Of SDR Bonds In China

The IMF in November announced plans to add the yuan to the U.S. dollar, the euro, the Japanese yen and the British pound in its elite basket of global reserve currencies, which are widely used in trades and held by governments and institutions as a foreign exchange reserve.

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."

 “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.”
 
 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.

 The IMF also announced the weight of the five currencies within the basket – the percentage of each based on its relative importance in the world's trading and financial systems – would be set at 41.73 percent for the dollar, 30.93 percent for the euro, 10.92 percent for the yuan, 8.33 percent for the yen, and 8.09 percent for the pound.

 Currency components of the IMF's special drawing rights