Mohammed Saqib
In a significant move, China’s issuance of $2 billion in USD-denominated sovereign bonds in Riyadh, Saudi Arabia, has generated considerable attention for its implications. While modest in size, the bond issuance has indicated China’s potential to challenge U.S. financial dominance. This strategic manoeuvre has captured the attention of financial analysts and policymakers alike, highlighting China’s growing influence in the international monetary system, and posing potential challenges to the longstanding dominance of the U.S. Treasury market.
The bond issue attracted extraordinary demand and oversubscribed nearly 20 times to over $40 billion. This level of interest far surpasses typical U.S. Treasury auctions, which usually oversubscribe between 2x to 3x. Such robust investor confidence indicates strong market appeal for China’s dollar-denominated debt, positioning China as a formidable contender in the global bond market.
One of the most striking aspects of this bond is its interest rat
e. China’s bonds were priced just 1-3 basis points (0.01-0.03 %) above U.S. Treasury rates, enabling China to borrow in U.S. dollars at nearly the same cost as the U.S. government. This narrow spread is unprecedented for a non-U.S. sovereign issuer. Typically, even countries with top-tier credit ratings pay a premium of 10 to 20 basis points over U.S. Treasuries when issuing USD bonds. This achievement highlights China’s improved creditworthiness and growing appeal to global investors.
The choice of Saudi Arabia as the venue for this bond issuance is especially noteworthy. Traditionally, sovereign bonds are issued in major financial hubs such as New York, London, or Hong Kong. By opting for Riyadh, China strategically positions itself within the core of the petrodollar system—a financial framework historically dominated by the United States. This move allows China to manage dollar liquidity directly within a crucial market, offering Saudi Arabia an alternative avenue for investing its substantial USD reserves outside U.S. Such diversification not only benefits Saudi Arabia but also deepens China’s integration into the global financial infrastructure.
The implications of China’s successful bond issuance extend beyond immediate financial metrics. If China continues to scale this initiative, it could become a significant competitor to the U.S. Treasury in the global dollar bond market. This competition has the potential to create a parallel system where China influences the flow of dollars worldwide, thereby diverting funds away from U.S. Treasury bonds. For the United States, which relies heavily on selling Treasuries to finance its substantial deficits, this could pose serious financing challenges and erode the “exorbitant privilege” that has long been a cornerstone of U.S. economic power.
China’s strategy could also be linked to its expansive Belt & Road Initiative (BRI). With over 140 countries participating in the BRI, many of these nations hold significant USD-denominated debts to Western lenders. China’s ability to issue USD bonds provides a mechanism to assist these countries in refinancing their existing debts. In exchange, China can secure repayments in yuan, strategic resources, or through other bilateral agreements. This approach not only helps China manage its USD surplus but also reduces dependency on the U.S. dollar within the BRI network, thereby extending China’s economic influence on a global scale.
The United States faces a challenge from China’s financial actions. Using traditional methods, like sanctions, could lower confidence in the safety of dollar assets. This might lead investors to move away from the U.S. dollar. Raising interest rates to make U.S. Treasuries more appealing could also raise the government’s borrowing costs, making the deficit situation worse. Taking stronger actions, like limiting China’s access to dollar transactions, might split the global financial system and reduce the dollar’s role as the main reserve currency.
China’s bond issuance represents a strategic opportunity for the international community, particularly for the incoming U.S. administration. By successfully issuing competitive USD-denominated bonds with low costs, China is effectively showcasing its financial capabilities and enhancing its strategic options. The United States may find it beneficial to reexamine its relationship with China, recognizing the importance of adapting to evolving global financial dynamics. This could also signal the dawn of a new and constructive phase in international monetary relations.
[Mohammed Saqib is the Convenor of Center of Geoeconomics for the Global South]
