Arnaud Bertrand:
I strongly suspect it’s a message to the upcoming Trump administration.
Let me explain what seems to be going on.
On the face of it, it’s not a major story: China issued $2 billion in USD-denominated sovereign bonds in Saudi Arabia, which means that investors lent USD to the Chinese government that they promised to pay back. That’s what a bond is. So far, relatively boring.
The first somewhat interesting aspect of it is that the bonds were oversubscribed by almost 20x (meaning $40+ billion in demand for $2 billion worth of bonds), which is far more demand than usual for USD sovereign bonds. Typically US Treasury auctions see oversubscription rate between 2x to 3x so there obviously seems to be very strong market appeal for China’s dollar-denominated debt.
The second interesting aspect is that the interest rate on the bonds was remarkably close to US Treasury rates (just 1-3 basis points higher, i.e. 0.01-0.03%), which means that China is now able to borrow money - in US dollars (!) - at virtually the same rate as the US government itself. That’s the case for no other country in the world. As a benchmark, countries with the highest credit ratings (AAA) typically pay at least 10-20 basis points over US Treasuries in the rare instances when they issue USD bonds.
The third interesting aspect is the venue itself for this bond sale: Saudi Arabia. This is unusual since sovereign bonds are typically issued in major financial centers, not in Riyadh. The choice of Saudi Arabia and the fact that the Saudis agreed to this 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 that compete directly with US Treasuries, and getting essentially the same interest rate, China is demonstrating it can operate as an alternative manager of dollar liquidity right in the heart of the petrodollar system. For Saudi Arabia, which holds hundreds of billions in dollar reserves, this creates a new option for investing their dollars: they can invest it with the Chinese government instead of the US government.
Ok, that’s all interesting but still not the main reason why Chinese social media is abuzz. The reason why is because they postulate that this is trial round by China to demonstrate to the US that they can effectively use their own currency against them, with potentially dramatic consequences.
How?
First of all, think it through, imagine if China scales this up and instead of issuing $2 billion worth of bonds, they start issuing 10s or 100s of billions worth of it.
What this means for the US is that China would effectively be competing with the US Treasury in the global dollar market. Instead of countries like Saudi Arabia automatically recycling their dollars into US Treasury bonds, they could put them into Chinese dollar bonds that pay the same rate.
This would create a parallel dollar system where China, not the US, controls part of the flow of dollars. The US would still print the dollars, but China would increasingly manage where they go. Imagine that…
Another critical aspect is that every dollar that goes into Chinese bonds instead of US Treasuries is one less dollar helping to finance US government spending. At a time when the US is running massive deficits and needs to constantly sell Treasury bonds to fund itself, having China emerge as a competing dollar bond issuer that can match Treasury rates could pose immense financing problems for the US government. It could effectively end the US’s so-called “exorbitant privilege”.
But wait, you might ask yourself, what’s the point of China having so many dollars? Don’t they transfer the problem to themselves: they too need to find a place to invest all these dollars, don’t they?
You’d be right, the last thing China needs is more US dollars: in 2023 it ran a US dollar trade surplus of $823.2 billion, and for 2024, it’s expected to be $940 billion. China is already absolutely awash with dollars.
But that’s where the beauty of the Belt & Road Initiative comes in. Out of the 193 countries in the world, 152 of these countries are part of the BRI. And a very common characteristic many of these countries have is: they owe debt in USD, to the US government or other Western lenders.
This is where China’s strategy could become truly clever. China could use its US dollars to help Belt & Road countries pay off their dollar debts to Western lenders. But here’s the key: in exchange for helping these countries clear their dollar debts, China could arrange to be repaid in yuan, or in strategic resources, or through other bilateral arrangements.
This would create a triple win for China: they get rid of their excess dollars, they help their partner countries escape dollar dependency, and they deepen these countries’ economic integration with China instead of the US.
For BRI countries, this is attractive because they can escape the trap of dollar-denominated debt (and the threat of US financial sanctions) and get likely better conditions with China, which will help their development.
In effect this would China placing itself as an intermediary at the heart of the dollar system, where the dollars still eventually make their way back to the US - just through a path that builds Chinese rather than American influence and progressively undermines the US’s ability to finance itself (with all the consequences this has on inflation, etc.).
At this stage you probably tell yourself “come on, there’s no way China can do that, the US government surely has tools at its disposal to prevent this stuff”. And the answer, surprisingly, is that there is actually little the U.S. can do that doesn’t undermine them in some shape or form.
The most obvious response would be to threaten sanctions against countries - like Saudi Arabia - or institutions that buy Chinese dollar bonds. But this would further demonstrate that dollar assets aren’t actually safe from US political interference, further encouraging countries to diversify, compounding the problem. The dollar’s strength partly comes from network effects - everyone uses it because everyone else uses it - but as we’ve seen with Russia sanctions create a coordinating moment for countries to move away together, weakening these network effects.
Another option would be for the Federal Reserve to raise interest rates to make US Treasuries more attractive. But this would be self-defeating: it would increase the US government’s own borrowing costs at a time when they’re already struggling with massive deficits, potentially triggering a recession. And China, getting similar rates as the US, could simply match any rate increase.
The US could also go for the “nuclear option” of restricting China’s ability to clear dollar transactions but this would effectively immediately fragment the global financial system, undermining the dollar’s role as the global reserve currency - exactly what the US wants to avoid. And with China being the most important trading partner of the immense majority of the world’s countries, nothing is less sure that the U.S. would win at this game…
In short this seems to be like some sort of Tai Chi ‘four ounces moving a thousand pounds’ (四兩撥千斤) move by China, using minimal force to redirect the dollar’s strength in a way that benefits China.
Like I wrote at the beginning however, at this stage this is most likely just a message by China to the upcoming Trump administration: “we can do this so maybe think very carefully about all the nasty things you have in mind for us…” The beauty of this move is how strategically elegant it is: it costs China almost nothing to demonstrate, but forces Washington to contemplate some very uncomfortable possibilities.
A) hilarious to middlemen yourself into the US-Dollar-Hegemony because the capitalists are too greedy
B) what do you mean this is generating buzz in china, are you telling me the average chinese person understands this? I could show this to like a hundred people off of the streets here and their eyes would glaze over
I’m guessing he means that it’s generating buzz amongst the people who care about this stuff. :)
I could show this to like a hundred people off of the streets here and their eyes would glaze over
yeah but depending on how you soundbite it, you can get both dems and repubs to react to *something-something-tariffs* with
Wonder if this is China’s future strategy or just showing their cards to US considering the stern talking Xi gave Biden some days ago. A warning to US to not rock the boat too hard. Telling US to die as peacefully as possible lol.
It seems to be what China’s doing, unfortunately I suspect this might be too subtle of a gesture for the imbeciles running the US to actually understand.
I doubt it, unfortunately. The US is basically a rabid dog, at this point, with wealthy leash-holders kicking it towards wherever they feel its destruction will be most profitable. Even if it would be more profitable for them to put the dog down and get on board with BRI… I’m sure there’s enough white supremacist assholes at that level of power who, not only would be insulted to do so, but can’t imagine they’re being outplayed by the ChINEsE!
totally
I thought this as well. This question feels a little lib-brained, but does Trump have any person or faction in his orbit who has the intelligence to understand and the power to act on this knowledge independently? And if not, is there a faction who has the clout and ability to relay this information to Trump in a way that he understands and favours over the advice of the more suicidally racist contingent of his administration?
I would say yes, if the people in Trump’s orbit understand anything, it’s money, bonds, interest rates, and leverage.
Why is China able to issue USD bonds at competitive rates to the US Treasury? Is it just because they have so many USDs lying around?
Yup, that’s precisely the reason. They have a big reserve of US bonds and now they’re putting them to use.
My eyes glaze over at financial stuff but I forced myself to read this because it seemed important, and I’m glad I did
But that’s where the beauty of the Belt & Road Initiative comes in.
The way I gasped. This is brilliant.
Yeah, this is a very clever way to use the dollar in a way that US will have a hard time countering.
But that’s where the beauty of the Belt & Road Initiative comes in. Out of the 193 countries in the world, 152 of these countries are part of the BRI. And a very common characteristic many of these countries have is: they owe debt in USD, to the US government or other Western lenders.
This is where China’s strategy could become truly clever. China could use its US dollars to help Belt & Road countries pay off their dollar debts to Western lenders. But here’s the key: in exchange for helping these countries clear their dollar debts, China could arrange to be repaid in yuan, or in strategic resources, or through other bilateral arrangements.
This would create a triple win for China: they get rid of their excess dollars, they help their partner countries escape dollar dependency, and they deepen these countries’ economic integration with China instead of the US.
TL;DR China is the Sun God Nika and the US is the Gorosei.
Also bullish for bitcoin.
death to america
@xiaohongshu@hexbear.net Thoughts?
Edit: I see that a good portion of what this article says are things that you have discussed (and let all the air out of) here: https://hexbear.net/post/3920843/5657051
But it also seems like there are a number of things that this Bertrand article is saying that counters some of what you were saying in that thread. The cycle that this Bertrand article is talking about seems fairly air-tight which is why I was wondering what you would have to say about it in addition to what you were saying in that other thread.At the risk of annoying everyone with users tags, I’m also curious what @BynarsAreOk@hexbear.net, @geikei@hexbear.net, and @AssortedBiscuits@hexbear.net, @meth_dragon@hexbear.net, @Fishroot@hexbear.net, @griefstricken@lemmy.ml think. Sorry if you don’t want to be tagged like this, let me know and I’ll edit this comment and make sure not to do it again.
IMO its far too early to say this changes anything at all and I’d rather look at it by the pattern China demonstrates where they care far more about building their influence through direct and “honest” gestures and statements rather than grand master plans. I make this case on #3.
1- Global south debt is a huge problem and I’m not sure the speculation that China’s sudden USD bond is going to fix this mountain of debt. I recommend looking at 2022 - The submerging market debt crisis and
A Broader Impact Than Ever Before: An Updated Estimate of the IMF’s Surcharges Pay attention to the next victims.
BRI investments got a long tail profile i.e China invests around $50 bln per year but most countries get a tiny fraction of this. BRI report on the net
The country with the highest construction volume in 2023 was Saudi Arabia, with about USD5.6 billion (up from 2.6 billion in 2022), followed by Sri Lanka (USD4.5 billion), Tanzania (about USD3.1 billion) and UAE (USD2 billion).
Regarding BRI investments, Indonesia was the single largest recipient with about USD7.3 billion in investments, followed by Hungary (USD4.5 billion) and Peru (USD2.9 billion).
What is actualy happening is some countries like Ghana were forced to restructure the debt.
Likewise Sri-Lanka recently defaulted as a typical example of this crisis and Bangladesh(his political analysis aside).
Western media claim that it is China that has forced Sri Lanka into crisis through is a policy of debt trap, by lending it more than it can pay back and then getting it to default, so acquiring control of the assets – the most famous example being the Hambantota Port project. But this is a myth. Only a little over 15% of Sri Lanka’s foreign debt is owed to China and most of that is in the form of concessionary loans. Most is owed to commercial creditors from the West and from India. Unlike concessionary loans obtained to carry out a specific development project, these commercial borrowings do not have a long payback period or the option of payment in small installments and rates are higher.
As he says these types of loans have even more drawbacks than usual, these are not even long term loans(Sri Lanka’s case anyway).
The situation is similarly dire in many major global south countries including Pakistan, Egypt, Ethiopia, Argentina etc.
What these countries need is immediate debt relief i.e snap a finger and cancel the debt tomorrow. The hopeful wishes of some Chinese long plan where some time in the future they may issue enough US bonds to maybe challenge the USD is just that, wishful thinking.
I’ll be the first to admit being wrong on this specific take if China does this 6 months from now or something. That would be better. Otherwise global south countries are facing immediate crisis. Nobody can afford to sit around for grand master plan shit except China of course.
2- The current oil market
Again just last month, Saudi themselves said they’d be willing to fuck with the price if OPEC didn’t take the production cuts seriously, threatening to fight down to $50 if necessary. Note: Yes OPEC rejected this reporting, but it may well be just KSA saying the quiet part out loud and OPEC saving face. Nobody wants to remember the price wars of 2014 and 2020.
The US imports a different type of oil better for refining. The vast majority of US oil imports comes from Canada. The KSA-US relationship is not as much based on oil as it was decades ago and the hype around the petrodollar death may be quite obsolete.
Where does that leave the Petrodollar? In the hands of the energy/oil dependent global south, China primarily. How much does this matter? Refer to the mountain of debt before. Global south needs dollars today and for the foreseeable future. I would talk about the trend of US oil independence(Canada is the 51st state) but at that point the planet boiled us all to death anyway.
3- KSA is moving away from oil anyway
SA is serious about their “Vision 2030” project and Chinese investment seems key to that. Saudi wealth fund signs $50 bln of deals with Chinese financial firms
Better yet, it is working for them.
China ready to work closely with Saudi Arabia, advancing together on path of development: Premier Li
Saudi Arabia relies on China as its largest trading partner and top oil importer, while China views Saudi Arabia as a key partner in securing its energy needs to meet its growing demand, Al-Shammari said.
On the diversity of bilateral cooperation, Li called on both sides to further expand bilateral trade, deepen cooperation in traditional areas such as oil and gas, petrochemicals and infrastructure, explore collaboration in emerging fields like new energy, information and communication, and the digital and green economies.
“China is the Kingdom’s first economic partner, especially in the commercial field, where trade reached a very high level, exceeding 100 billion U.S. dollars last year and also grew during the first half of this year. Trade between the Kingdom and China is equivalent to 90 percent of the total trade of the G7 countries, which are economically advanced,” Saudi Minister of Investment Khalid Al-Falih told Xinhua in an exclusive interview Wednesday.
Saudi Arabia and China are driving the development of their economic and trade relations through major initiatives such as the Belt and Road Initiative, which aligns with the Saudi Vision 2030, said Al-Shammari.
I mentioned earlier my first reaction was its no surprise China is making moves to help Saudi become a financial hub, Goldman Sachs literaly last month as the first Wall St firm to open offices in Rydiah.
I speculate this will be where CN vs US battle takes place for the future of the ME. For KSA this is already working for them.
Here is why I think China-KSA relations is probably the underlying reason for this move and not some grand dollar plan.
-China wants to secure good relations with SA in case Iran-Israel happens and in case someone starts targeting Chinese vessels with oil going from Saudi. Turn your head away now: Chinese envoy reiterates call for Houthis to respect rights of navigation in Red Sea
-KSA is serious about peak-oil and they want a path out if it. KSA understands the petrodollar is dead due to climate change anyway or the inevitable wars. KSA is securing investments from both sides and this is probably where CN wants to compete for influence. Remember it was the US that pushed CN away from Israel as CN influence grew threw BRI investments last decade e.g Haifa port, Israel IT etc. It could well be just China doing the same thing again in KSA.
-KSA got a massive advantage over Russia or Iran when competing over Chinese demand: US sanctions against RU/Iran. It means KSA can get, as they are already, billions worth of tech and industrial dials not available to either Ru/Iran. This benefits China as well as KSA becomes even more dependent on Chinese investments.
I’m in the same position as XHS regarding this situation. It sounds really convoluted as an explanation that sometime can be explained in more simple way, this is basically a sign that Saudi Arabia is not going to dedollarize and China is not willing to abandon export oriented economy. I think this is also expected from the “leader” of an non-ideological organization that is basically a complain bloc that put a fancy trade show time to time called BRICS
It also confirms that in the short\middle term China and the US is relatively ok with their current relationship all the saber rattling is just a way to force the other side to renegotiate their free trade conditions.
I am not convinced that this will be good for the global south countries that take on this debt, since they are still exposed to significant USD risk. If this was being loaned out to Germany, South Korea, et al then I wouldn’t be as bothered. But if say Kenya takes out a $1 billion loan to build a new port… it’s great that they have a new port. But they will need USD to pay back the loan. All it takes is a swing in the FX rates to get screwed over.
Edit: to clarify, I am not saying at all that this is Chinese imperialism or any other lib shit like that. Just that there are risks involved any time a global south country takes on debt in USD.
Isn’t the idea that they get loaned USD that they can then pay back in yuan
Yes I missed that part, my bad.
Good on you for accepting criticism, and noting your mistake. o7
I think if the goal is just paying off western loans from orgs like the IMF then there’s no increased risk. Basically, this scheme allows countries to conver their dollarized debt into something actually useful.
I don’t disagree, it’s not worse than the status quo for them.
I didn’t understand that at all. Global south countries are already indebted in USD, to the US or to western lenders, and struggle to get the money to finance infrastructure projects and other programs because of that debt.
That’s where China comes in with huge USD reserves, lends those countries the USD they need to build infrastructure, and offer the know-how through Chinese companies on how to build it. Then the terms of repayment don’t have to be “pay us in USD”, like it would be with any other lender, but it can be in yuan or other kinds of agreements, like payment in natural resources at a fixed rate.
I have my reserves on what the shape of these repayment plans might be, and what that means for the marginalized peoples of global South countries that enter the B&RI, but it is a move away from western hegemony, that’s for sure.
I missed the part that repayment can be in yuan.
No problem. I thought i was misunderstanding something, myself.
At a time when the US is running massive deficits and needs to constantly sell Treasury bonds to fund itself
Where will they find all the gold needed to back the value of the US dollar?
Perhaps the US will end convertibility and move to some sort of free floating currency system, and will be able to freely create and destroy US dollars
Where will they find all the gold needed to back the value of the US dollar?
They don’t need to. The US certainly doesn’t back it with gold anymore. Its value is in the fact that it’s what everyone uses and is largely forced to use because everyone else does. What the article called network effects.
Perhaps the US will end convertibility and move to some sort of free floating currency system, and will be able to freely create and destroy US dollars
The US already freely creates and destroys US dollars. And if they end all convertibility, that would completely undermine that network effect. The article addresses the same basic idea in the third to last OP paragraph starting with:
The US could also go for the “nuclear option” of restricting China’s ability to clear dollar transactions but this would effectively immediately fragment the global financial system, undermining the dollar’s role as the global reserve currency - exactly what the US wants to avoid.
Edit: unless your comment was a bit and I just ate your onion.
I’m very sorry, I should have ended that with an /s
No, I should have known better. Spending too much time gawking at the .world libs has damaged my irony/sarcasm detector.
