One of the most compelling reasons offered for sterling’s fall from grace in the interwar period was the surge in international USD debt issuance. The denomination of international debt can deliver all kinds of leverage – including feeding back into trade. And one commonly hears that the composition of a central bank’s FX reserves is partially a function of the sovereign’s currency mix of international debt. Evidence suggests that the dollar very much retains its crown as the preferred issuance currency – in fact it has become even more popular for EM issuers over recent years. The euro remains a distant challenger and despite the renminbi’s entry into the SDR in 2015, the Panda bond market – international debt issued in renminbi – remains exceptionally small. It seems that both issuers and investors remain concerned over both liquidity issues and China’s capital controls.
Looking at the global level, BIS data suggests the share of USD in cross-border liabilities seems to be relatively stable, with minor declines in banks and corporates recently (Figure 21). The role of USD-denominated international debt securities has been stable in recent years (Figure 22).
The subject of the currency choice of international debt issuance bears greater scrutiny. A European Central Bank working paper from 2012 made the compelling argument that sterling’s loss of supremacy in the inter-war years was a function of the surge in international debt issuance in dollars. In fact, the first ‘Strategic Target’ for the BRICS New Development Bank is to ensure that 30% of its total financing is done in local currencies. Looking deeper into this subject, currencies other than the USD and EUR have yet to make a significant impact in international debt markets, with ‘other’ currencies outside the USD, EUR and GBP making up just 6% of the outstanding stock, or US$1.8tn (Figure 23).
When drilling down further into these ‘other’ currencies, we can see a slight uptick in the use of the CNY over the past decade from almost nothing, which shows a slight increase in interest in the renminbi from investors, issuers, and perhaps Chinese officials too. But generally, this appears to have come at the expense of less use of other G10 currencies outside the USD and remains a tiny part of the international bond universe, with just under US$200bn outstanding (Figure 24).
