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September 4, 2009

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China buys US$50b in IMF initial bond issue

CHINA has agreed to buy US$50 billion worth of the International Monetary Fund's first bond issue to diversify the country's foreign reserves and boost the organization's lending strength as it works to speed recovery in the global economy.
The sale is part of the Washington-based IMF's effort to raise US$500 billion to finance lending to help economies battered by the downturn.
Under the deal, concluded in the US capital on Wednesday, China will buy up to 32 billion of the IMF's special drawing rights. SDRs are interest-bearing IMF assets based on a basket of four international currencies: the US dollar, the Japanese yen, the euro and the British pound.
"The agreement offers China a safe investment instrument," the IMF said in a statement. "It will also boost the fund's capacity to help its membership - particularly the developing and emerging market countries - weather the global financial crisis, and facilitate an early recovery of the global economy."
Dual benefits
Lu Zhengwei, an Industrial Bank senior economist, saw two-fold benefits in the agreement.
"Besides diversification, the SDR purchase can also help China seek stable returns as SDRs are relatively stable and secure," Lu said.
China is pursuing diversification of its mounting foreign reserves and seeking a higher standing in the global financial arena to reflect its rising economy might.
The Chinese economy expanded 7.1 percent in the first half, boosted by 7.9 percent growth in the second quarter. It is widely expected to lead major economies in surviving the global recession.
China took the unusual step of paying for the IMF bonds with 341.2 billion yuan - a currency that is not traded on global markets - rather than dollars, which it uses for much of its trade and other foreign transactions.
Yuan power
Analysts said that step could help spread the use of the yuan abroad. China signed a currency swap deal with Argentina in March and has agreed to lend yuan to the central banks of South Korea, Malaysia, Indonesia and Belarus in the event of emergencies.
China's foreign-exchange reserves grew to US$2.13 trillion at the end of June, up 18 percent from the same month last year and making it the sole country with more than US$2 trillion in foreign reserves.
China is the United States' biggest foreign creditor and is concerned about the value of the US dollar, prompting it to look for other investment options.
China cut its holdings of US Treasury bills by the biggest margin in nearly nine years in June to diversify its foreign reserves and increase returns, trimming its holdings 3.1 percent to US$776.4 billion.
Top Chinese financial officials earlier suggested using SDRs as a substitute for the dominant US dollar as the world's reserve currency, saying the global financial system should be more diversified.


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