China’s Mulan Bond Market Faces Limitations, Bank of Hebei Says

  • ‘Clear guidance’ needed on pricing, accounting of SDR bonds
  • ICBC says regulators can encourage more market making in debt

China’s market for bonds denominated in the International Monetary Fund’s Special Drawing Rights may struggle to develop rapidly, according to Bank of Hebei Co.

The lender, which bought the notes named after the historical woman warrior Mulan on the first day of trading, said there are limits to growth of the market. The World Bank issued the first such debt since the 1980s on Aug. 31. Bank of Hebei said the central bank hasn’t announced specific rules on whether to classify SDR bonds as local or foreign-currency notes in financial books. The yuan will enter the IMF’s basket of reserve currencies on Oct. 1.

“If the regulators can give clear guidance on Mulan pricing and accounting rules that may increase investors’ demand,” said Xiang Yuming, senior investment manager at the financial market department of Bank of Hebei. “It’s also a problem how to price Mulan bonds because the IMF reassess each currency’s weight in the SDR basket every five years.”

Chinese financial institutions are calling on regulators to step up efforts to expand the market for SDR bonds as the government seeks to promote greater use of the yuan around the world. On the first day of trading, there were only nine transactions involving the World Bank’s Mulan bonds, according to the China Foreign Exchange Trade System, regulator of the interbank market, which declined to give data for the following days.

Industrial and Commercial Bank of China Ltd., underwriter of the notes, said regulators can encourage financial institutions to provide more market making to help increase liquidity.

— With assistance by Xize Kang, Heng Xie, and Judy Chen

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