China issued $2 billion in USD-denominated bonds in Saudi Arabia, creating significant buzz within China. The bonds were oversubscribed by nearly 20x, indicating extremely high demand.
The bonds were issued at interest rates close to US Treasury rates, a unique scenario as no other country achieves such parity with the US.
These bonds were issued in Saudi Arabia, diverging from the typical financial centres, making it symbolically significant given Saudi Arabia’s role in the petrodollar system.
China could compete with the US Treasury by issuing larger quantities of USD bonds, creating a parallel dollar system. This could redirect global dollar flows, reducing the US’s “exorbitant privilege” in managing dollar liquidity.
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Redirecting investments to Chinese bonds could challenge the US’s ability to fund its deficits through Treasury bonds. With massive dollar surpluses, China could channel these into paying off the USD debts of Belt and Road Initiative (BRI) countries.
In return, China could receive repayment in yuan, resources, or bilateral agreements. This approach helps reduce dollar dependency for BRI countries while increasing their integration with China. It also allows China to offload its surplus dollars effectively and expand its influence. BRICS countries could escape the burden of dollar-denominated debt and US financial sanctions. They could potentially access better terms with China, aiding development.
Options to counter China’s move (sanctions, raising rates, restricting transactions) are limited and could backfire. Sanctions could push countries to diversify away from the dollar, weakening its network effect.
Raising rates would increase US borrowing costs, worsening its fiscal position. Restricting China’s access to dollar transactions risks fragmenting the global financial system.
This move is seen as a warning to the Trump administration about the potential consequences of antagonistic policies toward China. It showcases a low-cost, strategic maneuver by China to leverage the dollar system to its advantage.
China’s strategy could erode US dominance in the global financial system. It represents a symbolic yet impactful move in the ongoing geopolitical and economic competition between the two nations.
The fact that China could achieve spreads within 1-3 bp of US Treasuries indicates that the market is rejecting Western rating agency assessments.
