Chinese US$ bonds issue in Saudi Arabia to hit petrodollar?
Cyril Widdershoven
Geopolitical disruptive thinker, focused on Commodities, Geopolitics, MENA and Security. Assessing investments, FDI, SWFs, Key-Stakeholders and power players in MENA, EastMed and Central Asia.
The US dollar's position as an international currency power is under pressure. The issue of a US$2 billion sovereign bond package on the Saudi financial market could indicate that Beijing is eroding the US's power in financial markets. China's unexpected choice to issue sovereign bonds in Saudi Arabia is starting to worry financial power players in the USA. Chinese banks, such as the Agricultural Bank of China, Bank of China, and?the Industrial and Commercial Bank of China, back the latest sovereign bond issue.
Global interest in the bonds is exceptionally high, as investors have oversubscribed almost 20 times, reaching $39.73 billion, as stated by the Chinese Ministry of Finance's website. Media analysis is, at present, rather optimistic, but possible underlying issues are not addressed. The current feeling is that the registered strong demand for Chinese dollar-denominated bonds is a sign that financial markets are confident about China’s economic resilience and vast role in the international economy. Analysts all relate to the ongoing changes in the Chinese economy, its stable policy environment, and its potential. These factors, stated by mainstream media, however, are rather strange as looking at oil-gas markets, potential trade wars with the US (Trump) and EU, and a fledgling financial sector, are pointing to a less rosy future than currently being painted.
However, the primary outcome of the Chinese issuing a dollar-denominated sovereign bond in Saudi Arabia is that Beijing has moved from being linked to US-based financial centers and backers to new non-US markets. Beijing shows its capability to diversify its financing channels and significantly boost its debt restructuring situation. On the surface, it is also clear that China has opened up to developing a more diverse structure for its international development and cooperation strategies. The choice to issue the bonds in Saudi Arabia may look strange, but when realizing that the Kingdom holds vast US dollar reserves, the latter is an opportunity for both. It also strengthens the cooperation between Beijing and Riyadh in oil, gas, energy, ports, and infrastructure. Some even see the Chinese bond issue as part of Beijing's move to strengthen its OBOR (One Belt, One Road) project. Entering Saudi financial markets links or hooks the Kingdom even more to Beijing’s dream project. The latter also includes engaging foreign institutions and sovereigns in China’s financial markets. One of the drivers is the still perceived potential of the Chinese economy, but it is also seen as a part of a haven.
The total Chinese bond market, as reported by the end of 2023, is slated to be the world’s second-largest, behind the USA. According to the Bank of China, the volume has already exceeded $22 trillion (158 trillion yuan). Of these, around $4 trillion is held by non-Chinese investors, an almost tenfold increase since the Chinese Bond Connect system started trading in July 2017.
The success of the Chinese sovereign bond issue has been well documented. Some major aspects are, however, as several experts have stated in the last few days, not acknowledged at all. The fact that the Chinese dollar-denominated bond was issued not only in Saudi Arabia, which is not one of the most high-flying financial markets at present but also in the fact that the interest in Chinese bonds was extremely high should start to wake up some people. One striking factor is that the Chinese bonds attracted a much higher level of interest than normal US$ sovereign bonds, as the latter usually shows an oversubscription of 2-3X total. At the same time, China offered almost the same interest rate on the bonds, just 1-3 basis points higher, which means Beijing can access the US dollar market at the same rates as Washington. Until now, other major countries with the highest credit ratings (AAA) have been paying 10-20 basis points over US treasuries. ?This even happened in Saudi Arabia, which means it hit Riyadh, not London, New York, or any other significant financial center.
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Now, the most interesting aspect of all should also be discussed. Not only did Beijing offer it in Saudi Arabia, but the Kingdom even allowed and showed full interest. This means that one of the kingpins of the so-called petrodollar system entered a full-scale competition with Washington, as Beijing now has become an alternative manager of dollar liquidity (as some stated). Riyadh’s options have become very interesting, to say the least, as the Kingdom, holding hundreds of billions of dollars in reserves, can now choose where to invest its dollars. Before, the only real option was US markets; now, China competes.
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“In 1974, following the economically devastating oil embargo in which the price of crude oil per barrel rose four-fold, sparking a surge in inflation and weakening the economy, the U.S. desperately sought to avoid another embargo at all costs. U.S. politicians theorized that a stronger relationship with Saudi Arabia would go a long way toward achieving its goal.
Fortunately, the Saudis also hoped for a beneficial relationship with the U.S., and they needed a trustworthy investment home for their new oil riches. They also desired better military equipment. At the time, Saudi Arabia was running a huge budget surplus because of its windfall from high oil prices and relatively minor spending needs from within the country.
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While there was never a formal petrodollar pact, it is widely believed that the U.S. and Saudi Arabia had a handshake agreement to meet each other’s needs. Saudi Arabia was encouraged to invest its surplus dollars in safe, high-yielding U.S. Treasury securities. In exchange, the U.S. would sell Saudi Arabia's military equipment. Both hoped a better relationship would be a productive byproduct. Such is the petrodollar agreement.”
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Markets have been muted about these dramatic changes, as most are looking at the level of investments, which is only $2 billion. However, Beijing could increase the ante dramatically if it increased its dollar-denominated bond issues to $100-300 billion or even more. This would put Washington in a corner, as the American government continuously needs access to financial markets to pay for its booming debt levels. With China in the market for the same, former US-linked dollar reserves holders, such as Saudi Arabia, UAE, or others, could now choose Chinese options, not for US Treasury Bonds. Until now, these reserve holders have automatically been in the USTB market.
If this diversification increases, US government debts are at risk. China could actively increase the costs and threats to the financial stability of the US economy and potentially the global financial order.
For all looking at the already vast US dollar holdings of China, no, they will not have any issue spending an exorbitant influx of new dollars. The Chinese OBOR strategy, especially linked to high-profile and costly infrastructure projects in 3rd countries, will be a significant option for spending these reserves wisely (at least in the eyes of the Xi elite). US dollars will help, assist, and potentially force countries in Africa, the Middle East, North Africa, and Latin America to become financially dependent on Beijing, as most of their debts are dollar-denominated already. By providing OBOR-linked economies and governments with the ability to pay their debts to Western partners, China could and will be taking over. Considering the ongoing discussions within the China-led BRICS developments, China could be offering to be repaid in Yuan, effectively removing part of the existing power of the US dollar system now.
If this is allowed, China will not only be at the heart of the US-dominated global financial system but also be able to influence and constrain options to refinance the US economy, aka the government. This would undermine the US's current power position and enforce a possible stronger position for China overall.
The latter position, which in theory could derail part of the current global power structure, is not yet set in stone. The (un)expected election victory of Donald Trump as the upcoming US president could be a real constraint for China’s global power projections and the role of BRICs. Until now, most of the Western moves against the so-called Global South or the Dragon-Bear (Russia-China) attempts to change the global order have been largely unsuccessful. Most attempts to break up Russian power or China’s ongoing hunger for a Bi-Polar or Multi-Polar world have been countered by a possible Axis of Strong Men led by Xi-Putin and consorts. Successes have been booked by this new Axis, as shown in the growth of BRICS or the move by China to try to undermine the US dollar/petrodollar system.
Even if applauded by Moscow and others, the re-emergence of Trump could be, in reality, a positive development in light of power shifts. The Trump 2.0 Administration, in power January 2025, will be much more inclined to address the power shifts in Asia (China) but also be more able and willing to make a tit-for-tat or what some see as ‘a more business-deal’ approach to counter China-Russia power grabs. Without undermining the Biden Administration's positions, Trump already has set up a more active anti-China political team for the new Administration than we have ever seen before. With the floating of very strong positions on trade and export-import tariffs, combined with a geopolitical military focus on Asia, Washington will be willing to address future issues much stronger than ever before. A zero-sum game theory is again at play, in which, when linked to the position of the US dollar as the currency of choice, is not anymore a theoretical exercise but could be enforced by Washington, while the Rest of the West (not ROW), will be reaping the benefits too. ?
Trump will be more than willing to prevent any real undermining of the existing US dollar power position. Instead of low-level trade threats or partial sanction regimes, Trump’s advisors will target not only China as the main culprit, or maybe even Moscow’s overall links, but also address sanctions or other economic-military measures to remove any threats globally. Even though defending the US dollar will come at a cost, for minds like Trump, taking the MAGA approach, sanctioning or threatening countries and investors in case of supporting a Chinese attack on the USA, is not a far-fetched idea.? To set up a non-US-linked financial system or setting up additional US dollar markets outside of the USA will be very costly in a Trump era. How far the Trump “transactional approach” will be able to counter the Chinese moves is still unclear, but taking Trump as a boxer, this will be a “bare-knuckle fight”! After being able to use what some state as a Tai Chi approach, “four ounces moving a thousand pounds”, using minimal real force to change the strength of the US dollar by China, the coming years will be more like Mao’s assessment of real power (“coming out of the barrel of a gun”).
The US power is still holding much more a “Mao-istic” strategic position, especially when considering China's hidden debt position.? As stated by Chinese sources, the dollar-denominated bond issue in Saudi Arabia will remove part of the hidden debt held by local governments. The latter debt is slated to be around $1.99 trillion, putting immense risks to the economy's stability. As indicated by the Chinese National Congress Standing Committee, China's Ministry of Finance wants to reduce this debt to $320 billion by 2028.