Beijing-backed infrastructure bank mulling SDR bonds

The AIIB could issue bonds based on the IMF's virtual currency as it seeks to raise private cash to help fund China's infrastructure drive, its CFO tells a Hong Kong conference.

Beijing-led policy lender the Asian Infrastructure Investment Bank (AIIB) is mulling issuing bonds denominated in the International Monetary Fund's Special Drawing Rights, or SDR, its chief financial officer told a conference in Hong Kong on Wednesday.

SDR bonds from the AIIB would draw together two key policies for China's leaders: the internationalisation of the renminbi and its Belt and Road Initiative push to develop infrastructure and trade links in a vast swathe of countries stretching as far away as Europe and Africa. 

“My personal preference would have been to raise funds in SDR to be the functional currency of AIIB,” Thierry de Longuemar, chief financial officer of the Beijing-based lender, said in a conference hosted by the AIIB and the Financial Times. “It would not change the way we operate, but the signal of choosing a basket of currency – which is the functional currency of the IMF and the African Development Bank – would have been an interesting proposition.”

Longuemar made the remarks in response to a question as to why the AIIB would choose to raise funds in US dollars at the beginning rather than other currencies such as the renminbi.

For China itself, successful execution of any such deal would be a milestone as it would trigger a gradual inflow of funds into the renminbi, changing the global monetary landscape, as central banks, sovereign wealth funds and supranational institutions increase their allocations into renminbi-denominated assets.

Speaking to FinanceAsia on the sidelines of the event, Longuemar said: “Like the World Bank, we can choose to issue SDR denominated bonds but it can be settled in US dollar.”

"The timing of such an offering has not been finalised," he added.

Promoting the use of the SDR – a virtual currency of which the renminbi became the fifth component in December 2015, after years of pressure from Beijing  – is a key part of China’s strategy to boost international use of the renminbi and directly challenge the dollar’s dominance. 

The World Bank raised SDR 500 million (equivalent to $700 million) from a three-year bond settled in renminbi last year, providing mainland investors with an opportunity to diversify their portfolios into other foreign currencies.

Created by the Chinese government in January 2016 at the dawn of its Belt and Road push, the AIIB has since attracted more than 80 members, including major economic powers such as Germany and Britain. 

According to its latest financial statements in March, the bank has around $9 billion at its disposal and another $73.6 billion in callable capital. It has approved 21 contracts worth at least 2.8 billion, putting money to work in infrastructure projects from India to Egypt.

In a move to add new dry power, the bank secured the highest credit rating from all three international credit rating agencies this year, paving the way to issue its debut bond offering.

The world will need to spend $94 trillion on infrastructure projects from now to 2040, or $3.7 trillion each year, to support economic growth and ensure universal access to drinking water to electricity, according to Global Infrastructure Hub, a G20-backed think-tank. A key challenge identified by policymakers is how to encourage the private sector to take on some of this burden.

Currency hedge

To that end, institutional investors should consider working with multinational organizations, while also seeking more active hedging tools to mitigate risks, according to a senior official of Hong Kong's de facto central bank.

The Hong Kong Monetary Authority (HKMA) has been investing in property and infrastructure projects since 2009. That has included high-end property projects as far away as London, but in September it made a $1 billion push into emerging market infrastructure in partnership with the World Bank's finance arm, the International Finance Corporation (IFC).

“The partnership with the IFC gives us a strong pipeline of investment opportunities in emerging markets,” Eddie Yue, deputy chief of the HKMA, said in the same panel. “Given our risk appetite, the partnership allows us to invest in a more senior part of the debt structure.”

Yue also noted that the cost of hedging in emerging markets, especially in Asia, was relatively high because of a lack of liquid hedge marketing for institutional investors.

“In many emerging market, either the hedging market is very small or doesn’t exist,” the central banker added. “I think to put an inflation-adjusted feature in a local-currency bond offering helps investors mitigate currency risk, as inflation normally would go up if the currency depreciates,”

At present, currency swaps are the most popular hedging tools for foreign companies or investors to transfer their foreign exchange risks in local currencies, but the cost of buying into these contracts can significantly increase their borrowing cost or adversely impact their portfolio returns.

For information about our forthcoming supplement “Belt & Road - Driving Asia’s growth”, please contact Keith Frith on [email protected] or (T) +852 2122 5266. 


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