China continues to amaze the world, even the most advanced countries. Its latest move is something that perhaps few people imagined would come in the mold it has manifested: China issued a $2 billion bond in Saudi Arabia. This singular act has kicked off a chain of actions and reactions that will have a significant impact on the global financial system. Much of that impact, for now, remains hidden or unknown.
Yet, many analysts missed the significance of this action. Most have seen it as a mere financial transaction: China has borrowed an amount in dollars and promised to pay it back at some date in the future, which is what bond issuance is all about. It goes beyond this, says Arnaud Bertrand in his analysis of this transaction published on X.
By far, Bertrand’s treatment of China’s latest bold move seems to be the best, and my challenge here is to refrain from plagiarising it. He detailed the possibilities accruable from a dollar-denominated bond issued by China, and more still in a foreign land, in this case, Saudi Arabia.
China achieved a couple of interesting points with the issuance and these show its intent in embarking on this project. First, the choice of Saudi Arabia is quite significant. As some observers have noted, the choice of Saudi means that China has its eyes on the petro-dollar flowing in the heart of oil wealth. And it wants to have its cut of global liquidity by seeking to issue its bonds in this market.
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Beijing also tested its rating in the global financial market. It set out to raise $2 billion in a foreign market; the demand was overwhelming: an oversubscription of 20 times, meaning that investors demanded $40 billion! And when you add the fact that China offered a rate close to America’s treasury rates, then the significance of the 20X oversubscription, “which means that China is now able to borrow money – in US dollars (!) – at virtually the same rate as the US government itself,” wrote Bertrand.
We know that the capital market is the place where we price risks, and the bond market is the epicentre of this. This is why companies and, as in this case, countries who borrow by the issuance of bonds get varying rates, depending on the market’s assessment of the issuer. By issuing a bond in dollars in a foreign market, at a rate close to America’s treasury rate, China was pricing itself relative to America. A ‘law’ in finance says that two things that have the same value cannot sell at different prices. Was that what the investors who guzzled China’s bond at virtually America’s rate implied? Thus, if China set out to test the market’s perception of its economy, it certainly knows the result by now.
China’s latest move is simply a manifestation of its strategic thinking power. It shows the world how far into the future the Chinese system thinks or sees and begins to craft strategies for its actualisation. Simply put, the Chinese will do whatever they want, go wherever they want, and achieve whatever they intend to achieve simply on the strength of their strategic intent.
In his book, The World is Curved: Hidden Dangers to the Global Economy, David M. Smick declared that the three largest buyers of U.S. Treasury debt were Britain, Japan, and China. These nations, Smick argued, were not buying out of charity but because of their belief that the U.S. policymakers would continue to allow the American wealth machine to create healthy growth, and low rates of inflation, among others.
Those investors, in addition, also invested in non-treasury security assets in the US, believing that the entrepreneurial capitalist model of America was intact. This in part explains the level of China’s investments in the early 2000s into top-ranking companies in the West, says Smick. These included China’s investment of $3 billion in the private equity firm, Blackstone Group L.P. in July 2007. In October of the same year, The Industrial and Commercial Bank of China invested $5.5 billion in Standard Bank Group Limited.
Smick published his book in 2008, some 16 years ago. Between then and now, a lot has changed in the global financial system. China’s position in this market has grown and its impact has become more visible. In 2008, China’s GDP was $4.4216 trillion, versus $14.77 trillion for America. By 2024 Q3, the Chinese economy had grown to $13.004 trillion. That’s a little below half of America’s $27 trillion.
The Chinese leaders know those they are targeting by this master stroke of an investment decision. They want to invade the global financial system using the same system or strategy that has worked well for them in other markets: manufacturing, agriculture, infrastructure development or financing, etc.
But the truth is that all these actions that China is currently unleashing are not products of yesterday’s or today’s thinking. No! These were all weaved into its industrial, global competitiveness, and general economic policy frameworks.
In a conversation with a bond analyst, I expressed my amazement at the power of the Chinese to strategise. He responded simply: “That is because they don’t leave serious decisions to corrupt and incompetent people”.
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