This just hit the wire and confirms what we have been discussing for the past couple of weeks. The World Bank (International Bank for Reconstruction and Development, IBRD) has approved the People’s Bank of China to issue the SDR Bond. This is a major first step in delivering a realistic blow to the dominance of the U.S. dollar as world reserve currency. It is no secret that China has been making international moves to make the Renminbi (RMB) a more attractive currency on the global stage. This latest move solidifies the RMB as a world currency.
There has not yet been set a launch date for the first issuance of this new SDR Bond, however, in previous communiques there has been discussion to launch as soon as the end of August.
A lot of you are probably thinking “big deal, who cares”. Well, once this bond reaches it’s 3rd, 4th issuance and the demand begins to grow the impact this will have on U.S. Treasuries could be significant. The United States is the largest debtor nation in the history of the world and the U.S. Treasuries are the financial instrument that creates and maintains that debt. Once all these U.S. Treasuries begin flowing back into the U.S. economy that has the potential to create a lot more inflation that we are currently experiencing. That is merely one aspect of the overall. So, yes, it’s a big deal.
One of the main characteristics of this new SDR Bond is it will be issued in SDRs and redeemable in Renminbi (Yuan). The significants of this can not be overstated. This means that an investor in America who purchases the new SDR Bond will now have exposure to the RMB and hold fewer dollars in their portfolio. These investors can then use those SDR Bonds as collateral to make other purchases. The renminbi will now be on a level playing field as the other currencies that make up the SDR Basket of currencies. Currently the SDR Basket of currencies is made up of US dollars, Euro, Japanese Yen, British Pound Stirling and as of October 1, 2016 the Chinese Renminbi.
This is a big deal and has the potential to forever change the U.S. dollar and the bond market. Nay-sayers will be quick to point out these bonds were tried in the past. While that is true, the economic times were not as they are today.