World Bank passes a vote confidence in RMB yuan

15:27, January 11, 2011      

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The World Bank has decided to issue its first-ever Renminbi (RMB) yuan-denominated bond in Hong Kong, starting Friday, January 14 in a move that will help China to increase the use of its currency on global markets and in a hope to diversify investors' currency holdings and increase the exposure of the yuan. The 500 million yuan, or about 75 million US dollars, two-year fixed-rate bond offers investors a semi-annual coupon of 0.95 percent. The Notes will mature two years later, on January 14, 2013 (the "maturity Date").

The endeavor would help strengthen the position of RMB yuan on global financial market, according to world public opinions. Albert Keidal, a non-resident senior fellow at the U.S. Atlantic Council and a former economist of the World Bank representative office in China, noted in an interview with PD reporters that the World Bank's first yuan-denominated bond will help promote the Chinese currency's internationalization but the internationalization of yuan itself is definitely not the primary purpose of the issuance of RMB bonds.

The issue of yuan bonds comes as China's shareholding in the World Bank is set to increase as part of the realignment of voting shares announced last year. The World Bank agreed to increase China's voting power from 2.77 percent to 4.42 percent, lifting it to the third, according to an agreement reached at the 2010 April 24-25 Spring Meetings of the International Monetary Fund (IMF)-World Bank Group held in Washington D.C., and China's share in the IMF also rose to 6.39 percent, up by 2.39 percentage points, making it the third leading voice behind only after the U.S. and Japan.

The move will "further deepen the market and permit investors to diversify their currently holdings and expand renminbi exposure," the World Bank acknowledged in a statement, and the World Bank's global reputation will surely arrest the high attention of many international investors to the rapid growth of this capital market.

The issuance of RMB bonds by the World Bank is part of the bank's normal financing, rather than the scheme to finance a particular project. Doris Herrera-Pol, Director and Global Head of Capital Market, World Bank, said: "This is a landmark transaction for the World Bank, as it is the first World Bank issuance in RMB (yuan) and signals the strong interest of the World Bank in supporting the development of the RMB market."

Reuters, the Associated Press (AP) and other international media agencies hold that the World Bank's issuance of RMB yuan bonds, poses a reflection of investors' rising demand for yuan financial products. As a matter of course, the global capital market has long been dominated by the US dollar, the leading world reserve currency, and euro, while the Japanese yen also gained a certain market share.

However, yuan deposits in Hong Kong jumped 45 percent in late October 2010 from a month earlier to 217.1 billion yuan (32.6 billion US dollars) or 3.6 percent of total deposits. The Asian Development Bank (ADB), US construction equipment maker Caterpillar and the fast food giant MacDonald's, and other companies or institutions have issued offshore bonds denominated in yuan. And the Chinese government itself has issued the yuan-denominated bond in Hong Kong twice. So, the renminbi bond market, though currently insignificant, has been growing quite rapidly.

The international development agencies, including ADB, have issued the RMB yuan bonds in China for some time, and the yuan bonds' interest rates on the Chinese mainland is higher, but the interest rates in Hong Kong are very low and close to the low interest rates in New York. This means the World Bank has been able to raise funds at low cost in Hong Kong.

Speaking of the linkage between the first World Bank issuance of yuan bonds in Hong Kong and the internationalization of Chinese currency, Albert Keidel said the internationalization of Chinese currency will be a "decades-long process through mid-century". Nevertheless, he did not think that the World Bank will encourage China to open short-term maturity bonds or short-term capital accounts to attain the goal of capital account convertibility in the near future.

For China's recent measures to promote cross-border renminbi currency settlement for trade, Keidal said this is the natural development for China as a trading power, and China has felt the need due to severe hardships and a serious lack of fluidity during the global financial crisis. However, if China's per-capita gross domestic product (GDP) of some 4,000 US dollars is compared to a per-capital GDP of more than 400,000 US dollars for Western developed countries, the nation has a very long way to go before the RMB yuan wins the confidence of global financial market and becomes a reserve currency.

By People's Daily Online and its author is PD resident reporter in US Ma Xiaoning


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