August 26, 2016 2:00 am JST World Bank to issue SDR bonds in China for first time YUSHO CHO, Nikkei staff writer © Imaginechina/AP Images SHANGHAI -- The World Bank will issue bonds denominated in Special Drawing Rights in Shanghai at the end of August -- marking a status boost for the Chinese yuan. The float is seen comprising three-year bonds totaling 500 million SDR units. This comes to around $700 million, though the value of the International Monetary Fund's reserve asset varies based on the dollar, euro, yen and pound. Details will be announced as soon as Friday. Though denominated in SDRs, the bonds will be payable in yuan for both Chinese and foreign banks. Interest and principal upon redemption will be paid in the Chinese currency as well, with the amount depending on the SDR market. The bonds will be tradable on the Chinese interbank market, making them an important first step in setting up an SDR-based bond market in this country. The yuan will join the currency basket backing SDRs in October, and will thus help determine the bonds' value at the time of redemption. The People's Bank of China has authorized the World Bank to issue 2 billion SDR in bonds in the country. If the first float is successful, others could follow. The state-owned China Development Bank is gearing up to issue its own SDR bonds in September or later. These were initially to hit the market before the World Bank's, though Chinese authorities ultimately "prioritized the better-known" instruments, a financial-sector source said. The government in Beijing is encouraging a variety of banks and international bodies to put out SDR bonds. The World Bank's float comes just days before the Group of 20 summit in Hangzhou on Sept. 4-5. This is China's first time hosting the gathering -- an occasion the government hopes to use to demonstrate progress on making the yuan an international currency. Meeting that goal fully will take time, given that China still heavily regulates cross-border capital transactions. Issuing SDR instruments is seen as a step to improve the soon-to-be component yuan's global standing. But the complex nature of SDRs makes hedging currency risks challenging and often costly. Yields on the SDR bonds are also likely to be low, given that they are backed in part by the yen and euro. Investors may not be as hungry for the debt as Chinese authorities hope.
What is the significance of this? Are they issuing the bonds to preserve their foreign currency reserves which has declined over the last few years? Or, did they do it for political reasons that might not be so obvious? Because their national debt to their GDP is 43% and the U.S. is 104%. $700M is insignificant to a nation like China.
Not really. They only borrowed 700M and their debt to GDP is only 43%. Their industrial base is suffering and maybe the middle class, but their central govt. does not seem to be suffering. It's not like they have laid of millions of federal workers or reduced govt. spending. They have been banging the war drums for several years, annexed half the China Sea, begun to bully India and Vietnam on their borders and made alliances with Russia. They have also been buying gold and silver that have made other Treasuries envious. They have not been sacrificing. But, I can potentially see how the sale could be the first step to something bigger.