UPDATE 1-International development organization preparing to issue SDR debt in China - Caixin

(Adds economist comment, additional background)

SHANGHAI, July 25 (Reuters) - An international development organisation is preparing to issue the first debt instrument denominated in special drawing rights (SDRs) in China’s interbank market, online financial magazine Caixin reported, citing a central bank official.

The currency basket determining the value of SDRs, a synthetic reserve currency administered by the International Monetary Fund, will be expanded to include the yuan beginning in October, according to a long-awaited decision by the IMF last November.

The international development organization could issue the bonds as soon as late August, Caixin reported on Sunday, quoting Director of the People’s Bank of China International Office Zhou Juan at the G20 meeting in the southwestern city of Chengdu.

The Caixin report did not specify the name of the organization or the size of the issuance.

China would like to see the SDR more widely used, analysts say, as an alternative to the dollar for central bank reserves.

But the obstacles to scaling up demand are substantial. Previous attempts to create a broad-based private SDR debt market failed due to lack of demand, analysts say. Creating a significant Chinese domestic market could be a first step in overcoming that obstacle.

“China has been pushing for the SDR to become more widely used for some time, as a way to challenge the dominance of the dollar without pushing the renminbi as a direct competitor,” says Julian Evans-Pritchard, China Economist at Capital Economics in Singapore.

“But the question is whether other global central banks will be interested. Generally there’s not much demand currently, they prefer to hold securities in individual currencies.”

Buying interbank debt denominated in SDRs, whose value is linked to major foreign currencies including the dollar, euro and yuan, would allow Chinese domestic investors to increase exposure to foreign currencies within the country’s domestic bond market.

But the primary buyers are initially likely to be big state banks, says Evans-Pritchard, which would bolster an impression of robust demand for the market in its infant stages.

China’s government is studying plans to issue SDR-denominated bonds, according to a statement released at the end of the G20 meeting on Sunday. (Reporting By Nathaniel Taplin; Editing by Sam Holmes)