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7 Sep 2009

Financial Markets

China Buying IMF Bonds: SDR and CNY in Global Finance (Business Brief 2625)

On September 4, 2009, details about an agreement between the Chinese government and the IMF for China to purchase USD50 billion in Special Drawing Rights (SDR-dominated bonds) were released. The Chinese authorities said that they wanted to pay for the bonds in Chinese Yuan (CNY) instead of USD, as initially thought.
Our observation of developments in this matter and an initial analysis finds that this procedure in paying for IMF bonds could undermine the role of the USD in international finance matters in four ways.
1. ;SDRs” might become more important as a standard currency in international financial transactions.
2. Using CNY instead of USD to pay for the SDRs could supplant the USD in international finance.
3. SDR-dominated bonds could become an alternative for central banks in their international reserves as opposed to USD assets.
4. The IMF might use the CNY gained from the Chinese purchase of SDR-dominated bonds to lend to other countries, and/or use it in financial assistance to problem plagued member countries. That would implicitly cause the CNY to take a part in an international reserve currency of those countries receiving CNY-denominated financial assistance from the IMF.
KASIKORN RESEARCH CENTER (KResearch) holds the view that the significance of this transaction in paying for the SDRs bonds is that it is likely an elemental step in China's ongoing process toward increasing the role of the CNY internationally, after SDRs had been proposed as an alternative global international reserve replacing the USD at the G-20 meeting in early April 2009.
KResearch views that there are some issues that need to be monitored relative to this move, such as the agreements of other countries such as Brazil and Russia to buy SDR-dominated bonds of the IMF. The IMF has already welcomed commitments from these two countries to buy USD10 billion in new bonds each. India announced that they, too, would purchase these bonds. So, it is worth watching whether other currencies (aside from USD) will be used to buy IMF bonds, including the IMF' guidelines to manage the CNY they will receive. As said, China's use of the CNY to buy SDR-dominated bonds would accelerate CNY's roles in the global stage because the IMF, as an international monetary aid organization, can render financial support to their 186 member countries worldwide.

Regarding the greater role of the CNY in transactions with Thailand, Thai exporters should begin to focus earnestly on other currencies such as the CNY. This has been suggested by the BOT, and it has been reported further that the BOT is studying the advantages and disadvantages of bilateral Yuan swap agreements with the Chinese authorities. For Thailand, it is possible that international transactions in Yuan will increase in the future, consistent with the growth of trade between Thailand and China, because China is now our third-largest trade partner.

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