China just recently has issued $ 2 billion of USD-denominated sovereign bonds in Saudi Arabia. It means the Chinese government has borrowed United States Dollars and has promised to pay the principal and interest back as USD. The demand for it was overwhelming; the bonds were oversubscribed by almost 20 times. It means $ 40 billion demand for $ 2 billion issued by the Chinese Government. Generally US Treasury auctions see only an oversubscription rate between 2 to 3 times. It means there exists good market demand for US denominated bonds issued by the Chinese government. The interest rate was very close to that of the US treasury. The interest rates on these $ 2 billion was only 1 to 3 basis points above US treasuries (0.01 to 0.03 percent). It means the Chinese government is now able to borrow USD at the same rate as the United States government. Developed countries have to pay 10-20 basis points above US treasury yields when they borrow USD.
Why is this significant? It seems like China is sending a signal to the US and the new president that we can challenge you if you are going to be tough on us. Why is this challenging? First of all, these bonds mean there are very important rival for the US government to borrow USD. This can challenge US government finances. China has amassed a great fortune in USD. In 2023 China had a trade surplus of $ 823 billion with the United States.
Many developing countries in the China belt and road initiative have USD debt to the US government and other western lenders. China with a huge stock of USD denominated funds can help these countries to pay back its debt. The move reduces the country’s dependency to the US and pushes them toward more reliance on China second of all it would be a challenge for USD as the world reserve currency.
Source: Arnaud Bertrard at X
Photo: Nikkei asia
