USD

Slipping out on the wires this week, to little fanfare, was news that China had chosen Saudi Arabia as the choice spot for its first sale of a US dollar-denominated sovereign bond in three years. It was small, in the grand scheme of things, a quail egg sized $2bn, but it has got some analysts thinking about whether it could be the start of something bigger. Much bigger. Something more aligned with the mood music that the BRICs are going to cut the lunch of an ossifying, indebted West. The world order is changing. And going East. Hmm. Now, Riyadh is not the natural go-to venue for such an issue, which would typically take place in a NYC or a London, or any other ‘global’ financial centre. What Saudi has, though, is a lot of US dollars, sitting where it does at the centre of an increasingly brittle petrodollar system. What caught the eye was the demand. The issue was almost 20x oversubscribed, which is a tad more than the 2-3x for a typical US Treasury auction. The other point to read twice was the interest rate, which was, bar a basis point or two, the same as the US Treasury rate. Yikes. In plain English this means China can apparently borrow money – in USD – at basically the same rate as the US government. If China were to potentially scale this up, analysts argue, it would mean that Beijing would basically be competing with the US Treasury in the global dollar market, giving countries like Saudi a bit of choice for where to put their pile of dollars. Ya, ya, ya. It would quickly evolve into some sort of parallel system. The US Treasury would still print the dollars, but China would have a big say on where those dollars ended up. It would also mean that every dollar that went into a Chinese bond, would be one less dollar going to finance the eye-popping largesse of the US government. It begs the question, what does China do with all those dollars? It’s not exactly shaking the piggybank for spare nickel and dimes, given reports that it will have a dollar surplus of almost $950bn this year. Here is where – the analysts coo, eyes darting left and right, “it gets clever”. Enter the ‘Belt and Road’ initiative. Out of 193 countries in the world, it is murmured that 152 are ‘in the club’. And many of the 152 are loaded with USD-denominated debts. So then, mouth the analysts, China leans in, helps pay off these debts and in return makes all sorts of arrangements involving strategic resources or other bilateral agreements. With this sleight of hand, China gets rid of its excess greenbacks, helps countries escape dollar dependency, and coaxes regimes long tangible assets closer into the fold. China basically becomes a full-blown intermediary at the heart of the dollar system. The dollars will still someday get back the US, but en route they will build Chinese influence around the globe, at the expense of the US. Check mate.