Dollar Bonds Sold Out

Recently, the Ministry of Finance of China issued a US dollar bond in Saudi Arabia, and the official announcement was succinct, confirming the saying, "the fewer the words, the greater the matter."

This marks the first issuance of dollar-denominated sovereign debt overseas, and its performance has far exceeded market expectations. The total amount of sovereign debt is $2 billion, with subscription reaching an astounding $39.73 billion, a remarkable 19.9 times the issuance amount. The five-year offering even skyrocketed to 27.1 times, setting a global record in sovereign bonds history.

In addition to the astonishing subscription rate, there are a few interesting details:

Firstly, the bonds issued are of two maturities: three years and five years, with yields of 4.28% and 4.34%, respectively, while recently US Treasury yields have surged to 4.3%.

In other words, the interest paid by China for borrowing in US dollars is slightly lower than that paid by the United States itself.

Low borrowing costs indicate a favorable outlook from investors. Following the Federal Reserve's interest rate cuts, the benchmark rate has reached 4.5%, with US Treasuries offering merely a 0.2% discount, suggesting a significant perception of risk associated with US debt.

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Secondly, the five-year subscription rate exceeding 27 times indicates that investors are inclined to establish a long-term association with China.

Lastly, in the issuance of sovereign debt in Saudi Arabia, the host nation surprisingly acquired only 8% of the bonds. The majority was taken up by Asian buyers, while US investors surprisingly snatched up 4%. American capital, opting out of higher yielding US Treasuries, chose instead to invest in China-issued dollar bonds.

Of course, beyond these details, the most notable aspect is the breakthrough from zero to one.

For foreign exchange giants like China and Saudi Arabia, the rationale behind issuing dollar bonds transcends mere financing; it encompasses financial, diplomatic, and economic strategic positioning.

From the geographical distribution of investors, why did Asia account for the largest share? It’s quite straightforward: Asia is the principal buyer of Middle Eastern crude oil, and the bond issuance is inherently aimed at reviving US dollars that have been idling in the Middle East.

Moreover, the credence behind the sovereign debt is rooted in the renminbi, and although it is denominated in US dollars, this serves as groundwork for the future internationalization of the renminbi. Given China's foreign exchange reserves exceeding $3 trillion, $2 billion is merely a minor attempt.

Additionally, both China and Saudi Arabia have long accumulated substantial US dollars due to trade surpluses, holding considerable foreign exchange reserves while facing similar challenges: one is the risk of dollar depreciation, making the dollar assets of surplus countries vulnerable; the other is limited investment channels, with few reliable avenues for US dollar investments aside from US Treasuries, the safety of which is questionable.

For instance, China typically utilizes the large accumulation of dollars from trade surpluses to purchase US Treasuries; however, these do not yield substantial returns and are subject to the risk of being frozen at any moment. Saudi Arabia, accumulating hefty foreign exchange income from oil exports, lacks suitable investment paths, resulting in a vast waste of resources by leaving excess dollars idle.

While the subscription amount from Middle Eastern investors this time is low, the proportion has reached a historical high. Looking further ahead, the Middle East also aspires to reduce its heavy reliance on the oil and gas industry by introducing new sectors such as China’s renewable energy industry, photovoltaic equipment, and infrastructure investment, necessitating cooperation with capital from other countries.

Aside from investment and financing, the issuance of sovereign US debt also carries strategic considerations in light of concerns over tariffs and trade wars. This bond issuance signals, to a degree, the financing capability of Chinese sovereign debt and international investors' recognition of China's sovereign credit.

The dollars raised can serve as a capital pool for future industrial ventures aimed at countering impending tariff impacts. If more dollars can be sourced from sovereign debt globally, it could facilitate further industrial expansion overseas, allowing for deepened engagement and restructuring of industrial chain bases, with earnings in dollars flowing back to repay the initially issued US bonds.

This approach not only tackles tariff-related issues but also promotes the international expansion of the renminbi.

Moreover, it can assist nations experiencing dollar shortages, leveraging US dollar bond funds to support countries in Asia, Africa, and Latin America, providing financial aid to stabilize their economies, foster bilateral cooperation, facilitate resource exchanges, and enhance economic security. These nations could repay debts through tangible assets like resources and ports, thus avoiding the capital exploitation associated with dollar dominance while strengthening China's resource security. This maneuver not only circumvents US control but also amplifies China's voice in the global economic system.

The issuance of this dollar bond is not merely a borrowing action; it resembles a form of “financial diplomacy.” With this financial collaboration, it is likely that more countries in the future will opt to settle trade in renminbi, thereby magnifying China’s influence in the global market. In summary, this dollar bond issuance has broadened development opportunities for enterprises and secured long-term benefits for the nation and its citizens.

Coercing the weak has never been China's style; as evidenced by our support for infrastructure development in the Middle East, Africa, and Southeast Asia, we have always sought cooperative and mutually beneficial outcomes. After all, there are no winners once the guns have fired.