World Bank to issue SDR bonds in China

SHANGHAI/HONG KONG: The World Bank has set an indicative yield range for its three-year Special Drawing Right (SDR) bonds for sale in China at yields well below those for similar Chinese bonds, highlighting Beijing´s challenge in getting global recognition for its yuan currency and SDR assets.

The World Bank guidance for the landmark SDR bonds, to be settled in yuan, was set at 0.4-0.7 percent, the Shanghai Clearing House announced on its website, below the three-year Chinese government bonds yield at 2.434/2.387 percent.

The global lender, which got approval from the People´s Bank of China for a 2 billion SDR programme and is selling the first batch of 500 million SDRs ($700 million) of the notes in the interbank bond market on Wednesday, could find it a tough sell.

"We are not interested in SDR bonds and we can't see why Chinese investors should want these bonds since they can easily buy much higher yielding bonds in China," said a fixed-income fund manager in Hong Kong who invests both onshore and offshore debt markets.

The issue, the first SDR bond in 35 years, is being closely watched by investors as it´s part of a wider push in China to increase the net supply of such bonds, stepping up ongoing efforts to internationalise the Chinese yuan.

A successful opening sale will also be a strong endorsement of China´s moves to liberalise its capital market as Beijing holds the G20 summit in Hangzhou on Sept. 4-5.

The decision by the IMF last November to include the yuan currency in its SDR basket was seen as a diplomatic triumph for Beijing as China seeks full integration with the international monetary system.

The yuan will be formally added to the basket on Oct. 1.

Some analysts argue that the SDR bond may provide Chinese investors an opportunity to diversify their portfolios since Beijing´s control on capital outflows in the past year has made it difficult to buy overseas assets.

ANZ analysts said they expected China to encourage policy banks and other organisations such as the Asian Infrastructure Development Bank to sell SDR bonds and some of the issuance may be in offshore market.