China runs to Saudi Arabia to issue dollar bonds, is this a big game? Hello everyone, welcome to Old Fan Storytelling’s YouTube channel. Today we’re going to talk about China’s issuance of dollar-denominated debt in Saudi Arabia.
After many people saw this news, they quickly came out and said, “Awesome, my country, another big game.” Why do we have to say this? Because according to traditional Chinese thinking, it is not so honorable to issue debt or to go out and borrow money. But since we went out and issued debt, and the result of issuing debt is actually quite good, surely we have to come out quickly and say, “Look, we went to borrow money, and people are happy to lend us money.”
So is it a big game or not? What are some of the big game topics they are talking about? The first one is that this is the first time that China has issued dollar-denominated debt overseas. It’s a national debt, it’s not a corporate debt, it’s not any other kind of borrowing, it’s a sovereign debt of the country. Is that the first time or not? Let’s talk about it.
The second one, it’s pulling in the Saudis. I’m coming up to you to borrow money because I think highly of you. And what’s more, it’s to defuse the US influence on Saudi Arabia. Because after the Gulf War, U.S. influence in the Middle East in general, and on Saudi Arabia in particular, is very strong. Now we’re waiting to get inside them. And further down the line, it’s about pulling in Saudi oil dollars. The Saudis sold their oil and got a bunch of dollars back, because internationally oil is denominated in dollars. You can’t say I sold my oil and got a bunch of yuan back, or a bunch of rubles back, it’s all in dollars.
The Saudis are holding this pile of dollars, and instead of converting them into his own currency, they are holding them and investing them all over the world. Since you can go and invest in other people, why don’t you just come and invest in me, which is also part of a big game.
Finally, we have to come up with the idea that we are getting a mad rush to send out this bond, and people love our bonds. Is this true or not? Let’s talk about it one by one. First of all, let’s say that this is not that exaggerated. Why? Because of the small amount of money, a total of US$2 billion of dollar-denominated bonds were issued. 2 billion dollars, you think that is still small? Really, it depends on who you compare it to.
How much US treasury debt does China hold? 774.6 billion. Now go out and issue a 2 billion, this look at the gap is here. Then you say we hold more than 700 billion is not the most? Look at Japan, is more than 1 trillion U.S. Treasury bonds in hand. We actually used to be in the trillions, but it’s just been gradually dwindling over the years.
We’re constantly selling these U.S. bonds, or when a U.S. bond matures, we just redeem it and don’t continue to buy new U.S. bonds. So our U.S. debt is actually declining. But even so, we still have $774.6 billion of U.S. debt on hand. What about our $2 billion, which is basically negligible in terms of U.S. debt. So what’s the distribution of the $2 billion?
The three-year maturity of $1.25 billion has an interest rate of 4.284%; the five-year maturity of $750 million has an interest rate of 4.3%. We have to see that these are all relatively short-term debts, and there is no dare to borrow long-term ones in this. You say I borrow for 30 or 50 years, ah, no one dares to do this. Even if you do put a 30 or 50 year debt here, you may not be able to sell it.
So then, we just took a small stab at it, tried a little bit of money, and that’s about it. So is this thing popular? It is indeed popular. With a subscription multiple of 19.9 times, this is really high. What does this mean? It means that we said, we’re going to issue $2 billion of debt, and it turns out that there’s about $30, $7, $8 billion out there ready to be subscribed, so let’s split this thing. This is really high, because it’s mainly because the supply is so low, and our interest rate is actually lower than U.S. debt.
That is, the United States also issued bonds, we also issued bonds, we are not saying that we are willing to bear a higher interest rate in order to fool the money back. 2024 May 29, the United States Treasury Department issued 70 billion U.S. dollars of five-year treasury bonds, what is its interest rate? It’s 4.553; and our interest rate for the five-year is 4.3. So the interest rate that we’re offering is still slightly lower than the U.S. treasury bonds. Therefore, this point still says that our credibility in supporting the 2 billion dollars thing, or not too much problem, do not need to give a higher interest rate.
So is this the first time China has issued treasury bonds overseas? This matter, we know that the domestic actually a lot of treasury bonds, what treasury bills are actually even a kind of treasury bonds. In foreign countries this national debt is not the first time? This actually has a gray area. Why? Is Hong Kong considered an overseas country? Because in the past, we often issued US dollar-denominated bonds, but originally they were issued in Hong Kong. So if Hong Kong is considered overseas, this is not the first time; if Hong Kong is considered China, this is the first time.
An inseparable part since ancient times. Then, this Saudi Arabia this time, indeed is China’s first overseas issuance of treasury bonds. We started issuing dollar-denominated treasury bonds in Hong Kong in 2017, and in 2017, we issued a five-year and a ten-year, $1 billion each, and in 2018, we issued $1.5 billion for the five-year, $1 billion for the ten-year, and $500 million for the 30-year, which is pretty scary. By 2019 it’s at a record high, $6 billion, and then what about in this one, it’s three, five, ten, and twenty years.
By 2020 then, another $6 billion was issued, for three, five, ten and 30 years. By 2021, $4 billion was issued, three years, five years, 10 years, and 30 years as well.In 2022 and 2023, we actually didn’t go out and issue any new U.S. debt for those two years.The five-year in 2018 was supposed to be due in 2023, the five-year in 2017 was due in 2022, and the three-year in 2019 was supposed to be due in 2022 as well, and we paid that off. We are gradually paying those off, we haven’t borrowed in the last two years.
But then, it is also possible that we have played Hong Kong a little bit harder in these two years. You say again in Hong Kong to issue this debt, may not be issued. You have to have someone to subscribe to the debt, you may not be able to sell it, so these two years rested. And then the next debt issuance, is this year’s 2024 November, in Saudi Arabia issued 2 billion U.S. dollars debt. 2019 issued five years of debt, you should pay back.
So now a lot of companies or countries, what do they do with the debt they borrow, it’s called borrowing new to pay off old. I have to pay back the previous debt. 2021 issued three years of debt, it is time to pay back the debt. Because it’s actually relatively cost-effective to borrow new money to pay off old debt at this time. Why? The Fed cut interest rates ah, with a lower interest rate of the dollar, the money lent out after the original high interest rate debt repayment, this is actually cost-effective. A lot of companies, including this kind of big organizations will do this.
Does this count as a revitalization, what about the Saudi petrodollar, the amount is just a little bit too small. But it does serve a purpose. What does it do? It’s that after we go and issue treasury bonds in Saudi Arabia, it’s equivalent to saying that we’re using the country’s creditworthiness to issue debt over there. Then, when some other Chinese assets then go to Saudi Arabia to raise money and then go to Saudi Arabia to ask for money, there is an endorsement at the back.
Say that your adult is also borrowing money from me, and this child comes to borrow money. So let’s see, he will have such an effect. But the dollar debt itself is still relatively small. What about the other financial cooperation, which is indeed prying the Saudi petrodollars?
What are the others? Our SSE and SZSE, both stock exchanges, have now gone to Saudi Arabia to open ETFs, what does that mean? That is, he is in Saudi Arabia’s Liad’s stock market, issued an ETF of this product, the Saudi people can take their dollars to buy this ETF product. After these ETFs are bought, he will follow the various ups and downs of the Chinese stock market to operate.
What’s an ETF? It’s where we issue a fund and tell you that we say how we’re going to pick the stocks and how we’re going to match the ratio. You just buy my shares, and I’ll take that money and buy back all the stocks according to this ratio that I promised at that time. When it goes up, the whole ETF becomes valuable; when it goes down, the ETF goes down. That’s the way it works.
Right now, there are two ETFs up there operating on the stock exchange in Riyadh, Saudi Arabia. One is issued by the SSE and one is issued by the SZSE. What about this piece? It’s really prying, too, isn’t it? What else? Saudi Arabia’s state sovereign fund is also actively investing in China’s new energy, as well as other projects that they find interesting. This Saudi tycoon is still very rich, including what green energy, wind energy, as well as some new materials, transportation, many of these projects, they are running to invest, to see if they can actually earn money through these projects later.
Then Chinese enterprises, at the same time as the country borrowed dollar debt, but also in a very active effort to borrow dollar debt. Of course this, it is not necessarily run to the Saudi side to borrow to go. For example, Ali, they are in the U.S. stock market to borrow, byte jumping directly in Singapore to borrow. They are borrowing a lot of U.S. dollar debt, Ali probably borrowed more than 5 billion U.S. dollars, byte should be borrowed close to 10 billion U.S. dollars out of this kind of U.S. dollar debt.
So, the Chinese government to borrow 2 billion dollars, and so short-term dollar debt, this is really nothing. The country is also encouraging them to borrow dollar bonds, the country is not saying that we have money ah, you are not allowed to go out and borrow ah. You are willing to borrow, borrow to go ah, can borrow a little more borrow a little more, you let the business to operate properly, go abroad to buy things, no problem ah.
The state also encourages support. So you say, are we short of dollars or not? We’re holding over $700 billion in U.S. Treasuries, and we have a huge cash reserve of U.S. dollars. The Chinese government wants to spend money to go out and borrow U.S. debt, and various businesses want to spend dollars to borrow U.S. debt. What kind of situation is this?
The reason for this is not really complicated. Some money is dead money, or money that we’re going to put away for a long time to generate interest; some money is money that we’re going to spend right away. That’s actually how a lot of families live. We’ll put some money into investments and finances or whatever, but for a long time you can’t touch it. But what if I want to spend a little money in the short term? I can borrow some more.
But it still requires some modern knowledge of money management. Traditional Chinese families still prefer to live this life without owing money. When Chinese companies are trading in US dollars, are there formal procedures to get the dollars out of China to spend the country’s dollar reserves? Actually, there is, but the process is particularly troublesome.
Where is this trouble? Let’s say, for example, Alibaba says, “I’ve got a whole bunch of RMB, and I want to go to the U.S. to invest in a company or to acquire a project.” Then it should go to the Bank of China and say, “We’re going to move dollars.” And then call for the purchase of foreign exchange. First of all, we have to grant you a quota, how much money quota. After the approval, buy foreign exchange, you have to give your yuan to the Bank of China, the Bank of China will give you dollars. You then take this money and go abroad to buy the project you want to buy or invest in the corresponding project. This operation process is quite cumbersome and long.
When the Chinese government gets dollars, they become dollar reserves. Anyone who says, “I’m going to apply for it, I want to spend this dollar again.” Can’t I? It’s a pain in the ass. It’s like wearing your ribs on your skull, you really can’t afford it. The layers of approval for this process are very, very cumbersome.
So what’s the best way for a Chinese company that wants to do any transaction in the U.S. or overseas in U.S. dollar-denominated terms? They have U.S. dollars in their own hands. However, we also want them to remit all the dollars they have earned outside the country. What is the meaning of foreign exchange settlement? For example, you earn a bunch of dollars, and then put it to the bank to exchange it for RMB, this process is called foreign exchange settlement. You say, I take the yuan to exchange for dollars, this process is called the purchase of foreign exchange.
Our government wants to say, “Hey, you’re all clearing foreign exchange, but I’m going to have to approve you when you purchase the meeting.” So, when you need to spend, you can simply borrow some dollar debt outside and just spend that. The dollars that you earn outside, the exchange rate is settled back, and we become dollar reserves again. So that’s the way it works, including the government. We’re going to be spreading money overseas, we’re going to go to the aid of this Belt and Road brotherhood. You give him RMB, does he want it? Actually, I can’t say I don’t want it at all. After you give him RMB, the only use he can make of it is to take it directly to China to buy something. Otherwise, it’s harder for him to take the RMB and buy something elsewhere.
But what do you do when you say, “I want money to buy things in other countries?” And you have to give people dollars. What about that? Just have to borrow some dollar debt. Split it up among the little brothers and take it to the store. That’s how this thing works too. So what exactly is new with this borrowing of dollar-denominated debt in Saudi Arabia?
What about the first one, the Saudi petrodollar itself is very active. Now I’m telling you that you can lend money to China, lend money to Chinese companies, and then participate in the whole process of China’s rapid forward development. In other countries, there is no way to offer you such a high interest rate, or be willing to say that the money lent out, cribbing to engage in all kinds of construction, engage in all kinds of rapid development, this is something that other countries can’t do. China is willing to do it.
Every year, we also borrowed, but now Hong Kong can not play, we have to go to Saudi Arabia to borrow. 2 billion U.S. dollars in hand, next year should be stepped up. This year’s 2 billion dollars should be considered a small test, because only three years and five years, to next year may be 6 billion dollars, or more large-scale borrowing will be up. After it goes up, there may be 20-year, 30-year debt that will also come up, and this should be considered a knockout punch, which has already been thrown out.
Then with dollars in hand, you can trade more efficiently. For example, Saudi Arabia is now ready to go for massive infrastructure development, never mind that one long line of his cities, or some other sea water purification, there are a whole lot of such projects in the works. This Crown Prince is also an ambitious person. These projects infrastructure powerhouses must rush up and say, “Here, let me get it for you.” And how quickly? Let’s just take the dollars and go around to what we need to buy once we’ve issued the bonds.
Buy it, then give you all this stuff. After it’s built, you give me the money again, and then I’m going to pay off this debt, so that’s the most efficient way ah. In the future, the Saudis will probably be more and more closely tied to China, because they have their own problems. Their government and their leaders are being blamed by the Western media. They also have a lot of things they want to do, a big infrastructure, and they also want to do this thing. If they don’t play with us, who will they play with? You play with the Americans? After the Americans came, come let’s do an environmental assessment first, how many years you this you may not be able to move ah.
But you come to China, you say how to get it, we will get it for you ah, the other we do not care. So if you play along with us, it’s going to make a lot of the Saudi leadership’s dreams come true. That’s the general picture of what we’re doing now in terms of borrowing U.S. dollar-denominated debt. In the future, we may go to more places to borrow more dollar bonds. This money will also help the Chinese government and many Chinese companies to do more deals overseas.
Because these U.S. dollar debt after borrowing, it is impossible to say that the settlement of foreign exchange into the domestic, and then go to deposit it, will not do this thing, must be a large-scale overseas transactions. Good ah, this installment, we will talk to you here. Thank you for listening, please help like, point little bell, participate in Discord discussion group, also welcome interested and capable friends to join our paid channel, bye.