by Chris MacIntosh, International Man:
Ok, remember when I postulated some issues back that China could use their massive US treasury hoard to create a stable coin, such as Tether. A sort of Chinese crypto dollar, backed by their nearly $1 trillion treasury hoard.
The idea was that they could bypass Western financial infrastructure (no need for SWIFT or US intermediary banks). They’d still use dollars, but effectively use “their” dollars. They would trade with their counterparties (who all owe dollars), but allow for the convertibility to yuan… at their choosing. This would wean their trading partners off of dollars and reduce reliance on the US Western monetary system while simultaneously allowing China to use dollars to usurp the dollar system. My focus at the time was around crypto and how the use of Tether has already forged forward proving the theory for them. After all, copying is easier than creating, and they’ve all the incentives aligned.
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Well, guess what? I just came across an excellent tweet from Arnaud Bertrand (great follow on X, by the way.)
Pasted below is entirely from Arnaud.
“The story around China issuing USD-denominated sovereign bonds in Saudi Arabia is generating an enormous amount of buzz in China, and could potentially be immensely important.
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 be 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.
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