Why *China is Issuing USD-Denominated Sovereign Bonds* in *Saudi Arabia*?
China checkmates US
China issued €2 billion of notes in Paris in September in its first euro-denominated bond sale in three years
China’s move to issue USD-denominated sovereign bonds in Saudi Arabia is a calculated geopolitical and economic strategy with far-reaching implications. Here’s an analysis in points:?
1. The Basics of the Bond Issuance
Bond Value and Overwhelming Demand:?
a)????? China issued $2 billion in USD-denominated bonds in Riyadh, Saudi Arabia.?
b)????? The bonds were oversubscribed nearly 20 times, reflecting strong investor confidence in China's debt, even in USD terms.?
c)?????? This oversubscription is significantly higher than the usual 2-3x seen for US Treasury auctions.?
Low Interest Rates:?
a)????? The bonds were priced at just 1-3 basis points higher than US Treasuries, effectively borrowing at nearly the same rate as the US government.?
b)????? No other country has achieved such favorable terms, highlighting China’s growing financial credibility.?
2. The Significance of Saudi Arabia as the Venue
a)????? Unusual Issuance Location: Bonds are typically issued in major financial hubs (e.g., New York, London). Issuing them in Riyadh is unprecedented.?
b)????? Petrodollar Dynamics: Saudi Arabia is a cornerstone of the global dollar system ("petrodollar system"), where surplus dollars from oil sales are traditionally recycled into US Treasury bonds.?
c)?????? By issuing bonds in Saudi Arabia, China is signaling its willingness to challenge this system and position itself as an alternative destination for surplus dollars.?
3. China’s Geopolitical Message?
A Signal to the US and Trump Administration:?
a)????? The bond issuance may be a subtle warning to the incoming US administration, emphasizing China’s ability to operate within—and potentially influence—the global dollar system.?
b)????? The move underscores China’s financial and strategic capabilities, urging Washington to reconsider aggressive policies toward Beijing.?
4. Implications of Scaling Up USD Bond Issuance
Parallel Dollar System:?
a)????? If China increases the scale of its USD-denominated bonds, it could create an “alternative dollar market”.
b)????? Countries like Saudi Arabia could choose to invest in Chinese bonds instead of US Treasuries, reducing US control over global dollar flows.?
Impact on US Government Financing:?
a)????? Every dollar invested in Chinese bonds is one less dollar available for US Treasury bonds, complicating the US government’s ability to fund its growing deficits.?
b)????? This threatens the US’s “exorbitant privilege” of dominating the global financial system.?
5. The Belt & Road Initiative (BRI) Connection?
a)????? Dealing with Dollar Surplus: China, already awash with dollars due to its massive trade surplus, can use these bonds to create financial leverage.?
b)????? The BRI offers a clever outlet: China could help partner countries (152 of 193 globally) pay off their dollar-denominated debts to Western lenders.?
c)?????? In return, these countries could repay China in “yuan, resources, or strategic concessions”, further entrenching China’s influence.?
Triple Win for China:?
a)????? Get rid of excess dollars.?
b)????? Help BRI nations reduce dollar dependency.
c)?????? Deepen economic integration with partner nations.?
6. Challenges for the US?
Limited Countermeasures: The US has few options to counter this strategy without causing self-harm:?
a)????? Sanctions: Risk pushing countries further away from the dollar system.?
b)????? Raise Interest Rates: Would increase US borrowing costs and risk a domestic recession.?
c)?????? Restrict China’s Dollar Transactions: Could fragment the global financial system, undermining the dollar’s role as the reserve currency.?
Strength of the Dollar System: The dollar thrives on network effects—its widespread use ensures its dominance. However, actions like this create cracks, prompting countries to explore alternatives.
7. Strategic Elegance: A Tai Chi Move
a)????? China’s actions resemble a "four ounces moving a thousand pounds" strategy:? ?With minimal effort, China demonstrates its ability to undermine the US dollar system while benefiting economically and politically.?
b)????? Low-Cost, High-Impact Message: This bond issuance costs China almost nothing but forces the US to confront uncomfortable possibilities, including losing its grip on the global financial system.?
8. A Strategic Power Play?
a)????? The bond issuance is more than a financial event; it’s a “geopolitical maneuver” that showcases China’s growing influence in global markets and its readiness to challenge US financial dominance.?
b)????? The move underscores China’s strategic use of economic tools to align global financial systems with its long-term goals, setting the stage for a redefined global order.?
c)?????? Saudi is trying to attract Chinese investment in its green energy and tech exports. And China is also desperate for foreign direct investment, [with] Saudi a good source.
Searching for A New Naukri.
21 小时前Good Evening, can I forward this message sir
Chief Executive Officer at Strategic Partners
1 天前By issuing bonds in Saudi Arabia, China is strategically positioning itself within the heart of the petrodollar system. This could be seen as an attempt to challenge the dominance of the U.S. dollar and offer an alternative source of dollar liquidity. The bonds were issued at interest rates very close to those of U.S. Treasuries, despite China's lower credit rating compared to the U.S. This suggests a growing market confidence in China's economic stability, but also raises questions about the fairness of the rates offered. The choice of Saudi Arabia as the venue for this issuance is unusual and significant. It could be interpreted as a move to strengthen China's ties with Saudi Arabia and other Middle Eastern countries, potentially at the expense of U.S. influence in the region. The oversubscription of these bonds indicates strong international investor interest in China's economy. However, it also highlights the potential risks of shifting global financial power dynamics, which could lead to increased competition and tension between major economies.
Attorney and Management Consultant at IH Consulting Group
1 天前Thank you Harshad Shah for sharing though some aspects are debatable.
Senior Wealth Advisor
1 天前There is nothing of this sort. In plain and simple language… China borrowed money from Saudi Arabia by collateralising their Sovereign bond ( peer to peer sovereign borrowing) . China has implemented 1.4 T stimulus and need money for various purposes . Borrowing in US doesn’t increase RMB supply by printing in domestic economy. Using this 2B , China can restructure some of external borrowing ( by its companies supported by provincial governments) . Now, China can use that as forward payment between Saudi -China trade over the years of bond tenure. Buying oil is one aspect to pay back. This Credit -Commodity swap.