August 31, 2016 / 8:00 AM / in 2 years

UPDATE 2-World Bk sells landmark SDR bonds at lower-end of guidance, challenges loom

(Updates with bond sale price, PBOC statement)

By Michelle Chen and John Ruwitch

SHANGHAI/HONG KONG, Aug 31 (Reuters) - The World Bank sold its first batch of Special Drawing Right (SDR) bonds in China at a yield well below those for similar Chinese bonds, highlighting Beijing’s challenge in getting global recognition for its yuan currency and SDR assets.

The three-year bonds were sold at 0.49 percent, two sources with direct knowledge of the deal told IFR, a publication of Thomson Reuters, at the lower end of the World Bank guidance at 0.4-0.7 percent and below the three-year Chinese government bond yield at 2.434/2.387 percent.

A statement from the People’s Bank of China said the 500 million SDRs ($700 million) issue, which was settled in yuan, was 2.47 times oversubscribed, and that interested buyers numbered around 50.

The global lender has got approval from the PBOC for a 2 billion SDR programme, and despite the apparent success of Wednesday’s issue analysts say future demand for the bonds from local investors might prove tepid.

“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, and comes as Beijing hosts the G20 summit in Hangzhou on Sept. 4-5.

Analysts say China will be keen to foster interest in the SDR debt programme as it steps up efforts to internationalise the Chinese yuan, and further liberalise its capital markets.

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.

The SDR is a synthetic reserve currency administered by the IMF, whose value is determined by a basket of other major world currencies.

ICBC, China Construction Bank, China Development Bank and HSBC (China) were the lead underwriters of the bond. (Reporting by John Ruwitch and Michelle Chen; Editing by Shri Navaratnam)

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