(Yicai Global) April 24 -- China hopes to develop more products denominated in currencies included in the special drawing rights (SDR) basket to bolster market infrastructure and develop the secondary market, Yi Gang, a vice governor of the People's Bank of China, said at the International Monetary Fund spring meeting.
The World Bank and Standard Chartered Bank issued SDR-denominated bonds on the Chinese interbank market last year.
The SDR fulfills three functions, which are 'U-SDR', or Unit of Account, 'O-SDR' (Official SDR allocated by the IMF to designated government departments only) and 'M-SDR' (Market SDR, defined as SDR-denominated financial instruments offered on the market). The last one does not include any O-SDR distributed by the IMF, and can be held or issued by any private or public entity at any time, without applying for the IMF's approval. The issuance interest rates and settlement currencies for M-SDR bonds are determined by their issuers at their own discretion.
"China has made progress in terms of fulfilling all of the three functions of the SDR," he added, stressing that attention should rest on the development of the M-SDR secondary market. "We hope to drive the development of the secondary market for SDR-denominated bonds, but we're also aware of the deficiencies that exist in SDR bond transactions -- limited liquidity and high hedging and settlement costs, for example. We're looking to stimulate secondary market development by improving the market infrastructure and by introducing the market-making system."
The market will still be dominated by major currencies (reserve currencies such as the dollar, euro and the yuan) in future, but the SDR markets have considerable potential, especially from the traders' perspective, he believes. "But it must be driven by market forces, because the SDR markets can't develop successfully relying on the IMF and central banks alone," Yi noted.
The total volume of the SDR markets will grow substantially in future, he opined, though it might remain smaller relative to the US dollar and other major currencies.
The IMF instituted the SDR in 1967 as official reserve assets distributed and managed by the global governance institution.