GOOD MORNING FROM LONDON
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AN ARTICLE BY ARNAUD BERTRAND ON CHINA’S US DOLLAR DENOMINATED BONDS IN SAUDI ARABIA.
THIS MAY LOOK INTIMIDATING BUT IT IS AN EXCELLENT READ. NOT TOO TECHNICAL.
STICK WITH IT.
IT IS ABOUT THE US v CHINA
MY COMMENTS ARE AT THE END OF THE BERTRAND ARTICLE
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CHINA’S US$ BOND IN SAUDI ARABIA
ARTICLE BY ARNAUD BERTRAND
ANNOTATIONS IN BOLD ADDED
“The story about China issuing US dollar-denominated sovereign bonds in Saudi Arabia is generating a huge buzz in China and could potentially be extremely important.
I strongly suspect that this is a message to the incoming Trump administration. Let me explain what seems to be happening. On the surface, it’s not a big deal: China issued $2 billion in US dollar-denominated sovereign bonds in Saudi Arabia, which means that investors lent US dollars to the Chinese government, which promised to repay them. That’s what a bond is. So far, it’s relatively boring.
The first interesting aspect is that the bonds were oversubscribed by almost 20 times (meaning a demand of more than $40 billion for $2 billion of bonds), which is much higher than the usual demand for US dollar sovereign bonds. Typically, US Treasury auctions are oversubscribed by between 2 and 3 times, so this seems particularly attractive for Chinese dollar-denominated debt.
The second interesting aspect is that the interest rate on the bonds was remarkably close to US Treasury rates (only 1-3 basis points higher, or 0,01-0,03%), meaning that China is now able to borrow money – in US dollars (!) – at virtually the same rate as the US government itself. This is not the case for any other country in the world. For reference, countries with the highest credit ratings (AAA) typically pay at least 10-20 basis points more than US Treasuries in the rare cases where they issue bonds in USD.
The third interesting aspect is the location of this bond sale: Saudi Arabia. This is unusual because sovereign bonds are typically issued in major financial centers, not in Riyadh. The choice of Saudi Arabia and the fact that the Saudis accepted this offer is particularly significant given its historical role in the global dollar system, the so-called “petrodollar” system, which I don’t need to explain…
By issuing dollar bonds in Saudi Arabia, which compete directly with U.S. Treasuries and earn essentially the same interest rate, China is demonstrating that it can function as an alternative manager of dollar liquidity at the very heart of the petrodollar system.
For Saudi Arabia, which holds hundreds of billions of dollars in reserves, this creates a new option for investing its dollars: it can invest them with the Chinese government rather than with the U.S. government.
Okay, that’s all interesting, but that’s not the main reason Chinese social media is abuzz. The reason is that they’re postulating that this is an attempt by China to demonstrate to the United States that it can effectively use its own currency against them, with potentially dramatic consequences.
How? First, think about it, imagine if China were to step up its operations and instead of issuing $2 trillion in bonds, it started issuing tens or hundreds of billions. For the United States, that would mean that China would be competing with the U.S. Treasury in the global dollar market. Instead of countries like Saudi Arabia automatically recycling their dollars into U.S. Treasury bonds, they could invest them in Chinese dollar bonds that pay the same rate.
That would create a parallel dollar system in which China, not the United States, would control some of the flow of dollars. The US would continue to print dollars, but China would increasingly decide to print them. Try to imagine…
Another crucial aspect is that every dollar invested in Chinese bonds instead of US Treasuries is one less dollar that helps finance US government spending. At a time when the US is running massive deficits and constantly having to sell Treasuries to finance itself, the emergence of China as a competing issuer of dollar bonds that can match Treasury rates could pose immense financing problems for the US government. This could effectively end the US’s so-called “exorbitant privilege.”
But wait, you might be wondering, what’s the point of China having so many dollars? Isn’t it shifting the problem onto itself: it has to find somewhere to invest all those dollars, too, right? You are right, the last thing China needs is more US dollars: in 2023, it had a US dollar trade surplus of $823,2 billion, and for 2024, it is expected to be $940 billion. China is already completely awash in dollars.
But herein lies the beauty of the Belt and Road Initiative.
Of the 193 countries in the world, 152 are part of the BRI.
And a very common characteristic of many of these countries is that they owe debts in US dollars, either to the US government or to other Western creditors.
This is where China’s strategy could get really clever.
China could use its US dollars to help Belt and Road countries repay their dollar debts to Western creditors. But here’s the key: in exchange for helping these countries pay off their dollar debts, China could arrange to be repaid in yuan, strategic resources, or other bilateral arrangements. This would create a triple benefit for China: it would get rid of its excess dollars, it would help its partner countries escape dollar dependency, and it would deepen these countries’ economic integration with China rather than with the United States.
For the BRI countries, this is attractive because they can escape the dollar-denominated debt trap (and the threat of US financial sanctions) and probably get better terms with China, which will help their development. Indeed, it would amount to placing China as an intermediary at the heart of the dollar system, where dollars always end up going back to the US – just in a way that reinforces Chinese rather than American influence and that gradually undermines the US’s ability to finance itself (with all the consequences that this entails for inflation, etc.).
At this point, you’re probably thinking, “Come on, China has no chance of doing that, surely the US government has tools at its disposal to prevent that.” And the answer, surprisingly, is that there’s not much the US can do without weakening them in some way.
The most obvious answer would be to threaten sanctions on countries like Saudi Arabia or institutions that buy Chinese bonds in dollars. But that would demonstrate once again that dollar assets are not really immune to US political interference, which would further encourage countries to diversify, making the problem worse.
Part of the dollar’s strength comes from network effects—everyone uses it because everyone else uses it—but as we’ve seen with Russia, sanctions create a moment of coordination for countries to move away together, which weakens those network effects.
Another option would be for the Federal Reserve to raise interest rates to make U.S. Treasuries more attractive. But that would be counterproductive: It would raise the U.S. government’s borrowing costs at a time when it is already struggling with massive deficits, potentially triggering a recession. And China, with similar rates to the U.S., could simply match any rate increase.
The US could also take the nuclear option of restricting China’s ability to clear dollar transactions, but that would immediately fragment the global financial system, undermining the dollar’s role as the world’s reserve currency, which is exactly what the US wants to avoid. And with China being the largest trading partner for the vast majority of the world’s countries, it’s far from certain that the US would come out on top in this game…
In short, it looks like a kind of “four ounces moving a thousand pounds” (四兩撥千斤) Tai Chi on China’s part, using minimal force to redirect the dollar’s strength in a way that benefits China. As I wrote at the outset, at this point this is probably simply a message from China to the incoming Trump administration: “We can do this, so think carefully about all the bad things you have in mind for us…” The beauty of this move is its strategic elegance: it costs China almost nothing to demonstrate, but forces Washington to consider some very uncomfortable possibilities.”
source: Arnaud Bertrand
IN ESSENCE THE ARTICLE STATES;-
China issued $2 billion in US dollar-denominated sovereign bonds in Saudi Arabia.
The Issue is over-subscribed more than 20 times
The interest rate on the bonds was remarkably close to US Treasury rates.
The Bond was issued in Saudi Arabia – not a major financial centre.
China is demonstrating that it can function as an alternative manager of dollar liquidity at the very heart of the petrodollar system.
- This means that Saudi Arabia can invest its US Dollars with the Chinese government rather than with the U.S. government.
- Every dollar invested in Chinese bonds instead of US Treasuries is one less dollar that helps finance US government spending.
- The emergence of China as a competing issuer of dollar bonds that can match Treasury rates could pose immense financing problems for the US government.
- But China is already completely awash in dollars. Its holding is $940m. The last thing China needs is more US dollars?
- But this works well for China because 152 countries of the 193 countries in the world are part of China’s Belt and Road Initiative.
- China could use its US dollars to help Belt and Road countries repay their dollar debts to Western creditors.
- In exchange for helping these countries pay off their dollar debts, China could arrange to be repaid in yuan, strategic resources, or other bilateral arrangements.
- This creates a triple benefit for China:
- First – it would get rid of its excess dollars,
- Second – it would help its partner countries escape dollar dependency,
- Third – it would deepen these countries’ economic integration with China rather than with the United States.
- This is attractive to BRI countries because they can escape the dollar-denominated debt trap (and the threat of US financial sanctions) and probably get better terms with China,
- It would amount to placing China as an intermediary at the heart of the dollar system,
- But surely the US government has tools at its disposal to prevent that?
- There’s not much the US can do without weakening them in some way.
- The US could threaten sanctions on countries like Saudi Arabia or institutions that buy Chinese bonds in dollars. But that would demonstrate once again that dollar assets are not really immune to US political interference, which would further encourage countries to diversify, making the problem worse.
- Another option would be for the Federal Reserve to raise interest rates to make U.S. Treasuries more attractive. But that would be counterproductive. Why?
- It would raise the U.S. government’s borrowing costs at a time when it is already struggling with massive deficits, potentially triggering a recession.
- And China, with similar rates to the U.S., could simply match any rate increase in any event.
- The US could also take the nuclear option of restricting China’s ability to clear dollar transactions,
- But that would immediately fragment the global financial system, undermining the dollar’s role as the world’s reserve currency, which is exactly what the US wants to avoid.
- And with China being the largest trading partner for the vast majority of the world’s countries, it’s far from certain that the US would come out on top in this game.
- It would simply amount to a message from China to the incoming Trump administration: “We can do this, so think carefully about all the bad things you have in mind for us…”
- The beauty of this move is its strategic elegance: it costs China almost nothing to demonstrate, but forces Washington to consider some very uncomfortable possibilities.
- It is about the change in power.
GRAHAM PERRY COMMENTS;
What is the Big Picture – the Over-Arching Global World Setting in 2024?
It isn’t the Ukraine War serious though it is in terms of loss of life. It isn’t even the Middle East notwithstanding the Hamas attack of 7 October 2023 and the Israel genocidal response. Both events involved tragic and unnecessary loss of life in Europe and the Middle East and are a reason for humanity as a whole to engage in a massive wringing-of-hands exercise.
In terms of global significance for today, tomorrow and the next one hundred years at the minimum, the key struggle is that between the US and China.
At first sight such a contest while talked about by the opinion makers is more about tomorrow than today. Battle lines are being drawn; alliances are being formed; strategic allocation of military force is underway and yet it does not catch the imagination of the world in large numbers.
The focus is on the other trouble spots but in the US and China leaders and strategists know what is coming down the road. You can gauge the growing importance of the coming face-to-face by a casual reading of the leading political journal – Foreign Affairs. It highlights what is regarded to be #1 World Conflict.
And this is not a surprise. This is History. This is about the Rise and Fall of Leading Powers. Alexander the Great, the Roman Empire, Hannibal the Great, Genghis Khan, Attila the Hun, Charlemagne, Henry V, Peter the Great and so on up to the present day. Eras come and Eras go. Empires grow and Empires founder. Power ebbs and flows. Historians of the future will be writing at length about something which has yet to occupy the minds of so-called experts who believe they have their finger on the pulse of time.
The UK was at its peak in 1895. The US in 1990 after the fall of the USSR. Fukiyama signed off the years with his famous End of History – Liberal-Democracy had won out; autocracies were living on borrowed time; the future was ordained.
Not quite. China is the new boy on the block. It is the upstart that threatens the global structure hitherto presided over by the US. But before we come to China let’s look at the dilemma facing the US. In a phrase it is over-stretched. Its 800+ military bases distributed around the world – but focused in the Far East – have taken their toll. Trump and MAGA is a recognition that the US needs to adjust. It has taken on too much. It has to trim but Great Powers struggle big time when they have to cut, re-prioritise, re-focus and adjust. It goes against the grain. They are Big. They know their Big and they want to remain Big.
Now to China – the mirror image of the US. It might seem so at first sight but China is different. The Military do not follow the Traders. China has invested millions of dollars lending money to developing nations to build power stations, ports, railways and motorways but its Army. Its Navy and its Air Force are all stationed within China. The West has done the opposite – wherever trade went the military were in hot pursuit. The US has 800 military bases overseas. China has just one.
But why? If China is the new Empire its military might should be overseas protecting its investments.
The truth – China is different. It is a Big Power. It will become an even bigger Power. Its influence will grow. But it will never be an Empire. It is braced for conflict. It has increased the size of its military but not for foreign gain or foreign expansion or to become the new Empire. There is one principal governing China’s development – two words – “Mutual Benefit”. It has to work for both sides.
China is growing. It will continue to grow. It will acquire more influence. It has loaned funds to 120 countries through its Belt and Road Initiative – far in excess of anything advanced by the West and not one Chinese soldier, sailor or pilot in attendance. China is something new. Very new and the world continues to watch as the politics of the new big power makes its influence felt and that is the significance of China’s new US$ denominated bonds in Saudi Arabia. It is a big statement about the Present and an even bigger statement about the Future.
GRAHAM PERRY
NEXT CHINA POST #544 –
NEPAL,
ELON MUSK,
CHINA AND US,
BELT + ROAD AND SECURITY.
