China explores buying $50bn in IMF bonds

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Jamil Anderlini, Charles Clover, Financial Times
June 5, 2009

China is “actively considering” buying up to $50bn of International Monetary Fund bonds, the country’s State Administration of Foreign Exchange has said.

John Lipsky, IMF first deputy managing director, confirmed the Chinese proposal, which follows one by Russia to buy $10bn (€7.1bn, £6.2bn) in IMF bonds.

Friday’s statement by China said any investment would be made according to its usual criteria of “safety and reasonable returns”, but made no mention of Beijing’s wish for more power in IMF decision-making, in return for financial support.

Safe, which controls almost $2,000bn of China’s foreign exchange reserves, added it was ready to help the IMF explore more ways to raise finance.

Mr Lipsky said the Chinese and Russian proposals were part of a commitment made during the London G20 summit in April to augment IMF resources by $500bn, and that the IMF “absolutely welcomes” the commitments.

The IMF expects to submit a proposal in the next few weeks that would allow it to raise money through issuing notes or bonds.

The pledges by both countries seem to have some political motivations – both China and Russia make no secret of their desire to have a greater say in how the IMF commits money.

Vladimir Putin, Russia’s prime minister, proposed the money from Russia, for example, should be earmarked to help Ukraine pay for Russian gas, avoiding a stand-off with Kiev over the issue of gas payments which crippled supplies to Europe in January.

Mr Lipsky said it would be against IMF guidelines to get involved. “The ongoing disputes between Ukraine and Russia are commercial issues,” he said.

“We wouldn’t enter directly into a commercial arrangement but of course our programme contemplates the external funding needs of Ukraine. Our programme is always predicated on helping our member countries meet balance of payments needs. But we would not be involved directly in a commercial transaction.”

Asked if the programme to Ukraine could be increased at all he said: “Never say never, but it would depend on the evolution of events.”

Meanwhile, earlier this year, China’s central bank governor caused a stir in global currency markets when he proposed replacing the US dollar as the world’s reserve currency with Special Drawing Rights, the IMF’s unit of account.

Zhou Xiaochuan also said SDRs should be based on a basket of currencies, including China’s renminbi.

Chinese officials have indicated that at least some of the IMF bonds it will buy will be in SDRs, which would help to diversify its US dollar-dominated foreign exchange reserves.

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