China’s issuance of dollar-denominated sovereign bonds in Saudi Arabia at the end of last year could have broader implications for the global financial system. On the surface, the modest $2bn raised at the auction appears insignificant. However, as governments worldwide compete for capital, this development could have profound ramifications for the US.
One of the most striking elements of the bond auction was the overwhelming investor demand it attracted. The bonds were oversubscribed by nearly 20 times, with more than $40bn in bids for the modest $2bn offering. This level of interest far exceeds the usual demand for dollar-denominated debt, with US treasury auctions typically achieving oversubscription rates of two or three times the offered amount.
The extraordinary level of interest suggests that China’s dollar-denominated debt is becoming increasingly attractive to global investors. Considering China earns more dollars from trade than any other country on the planet, this enthusiasm is understandable as China will always be able to repay its foreign creditors. This is already reflected in Chinese 10-year notes, which are trading at less than half the yield of US 10-year treasury bonds in 2025.
Another intriguing factor is the interest rate at which China was able to secure this financing. These bonds were issued at rates only marginally higher than those offered by US treasuries, with a spread of just one to three basis points (0.01% to 0.03%) above US rates. This is unusual, as even countries with the highest credit ratings, such as those with AAA ratings, typically pay at least 10-20 basis points (bps) above US treasury yields when issuing dollar-denominated bonds.
That Beijing was able to borrow money in dollars at rates matching those of the US government underscores the country’s growing financial influence as well as the market’s willingness to treat Chinese debt as a viable alternative to US treasuries. This coincides with a steepening yield curve for US treasuries and Chinese yields falling below their Japanese equivalents for the first time.
Equally intriguing was the choice of venue for the bond sale. Sovereign bonds are usually issued in major financial centres such as New York, London or Hong Kong. However, China opted to issue the dollar bonds in Saudi Arabia. This decision is significant due to Saudi Arabia’s historical role within the “petrodollar” system, which saw oil transactions priced and conducted in dollars.
By issuing dollar bonds in Saudi Arabia and matching US treasury rates, China has positioned itself as a competitor in managing dollar liquidity within the heart of the petrodollar system. For Saudi Arabia, which holds substantial dollar reserves, this would allow the kingdom to allocate funds to Chinese dollar bonds instead of recycling their oil revenues into US treasuries.
The implications for the US are considerable. In addition to promoting the internationalisation of the yuan and developing alternative payments systems within Brics to settle trade transactions without relying on Swift or the dollar, China’s dollar bonds suggest Beijing could simultaneously look to co-opt the exiting dollar-based financial system for its own purposes.
If Beijing were to issue larger volumes of dollar-based securities, China would effectively be competing with the US treasury to attract global dollar liquidity. This could alter the behaviour of countries such as Saudi Arabia and other large holders of dollar reserves, who could diversify their dollar holdings away from US treasuries in favour of lower-risk Chinese debt.
This could have profound consequences for US fiscal policy. Every dollar invested in Chinese bonds instead of US treasuries is a dollar that does not help finance US government spending, including arms donations for Taiwan. While the US is running substantial budget deficits and relying heavily on treasury auctions for funding, China’s emergence as a competing issuer of dollar-denominated debt could worsen the US government’s fiscal challenges.
Such a shift could create a parallel dollar system, in which China plays a more prominent role in managing the global flow of dollars. The US would still set short-term dollars interest rates and control the supply of the currency, but China would increasingly influence where those dollars are deployed. China already nets about $1-trillion annually from trade and issuing dollar bonds could divert even more capital towards Beijing’s Belt and Road Initiative (BRI).
China remains a net creditor to the global economy and with more than 150 countries participating in the BRI, Beijing could borrow dollars at low interest rates and relend this capital to developing nations. These states could then repay these loans in yuan, strategic resources or domestic currencies, allowing Beijing to take control of the global financial ecosystem.
Diverting dollar financing away from the US and towards China’s emerging market allies could also help alleviate liquidity bottlenecks in emerging markets and boost global economic growth, which has been somewhat anaemic in an era of trade disruptions and high-interest rates. This is an important strategic objective for Beijing as China seeks to increase its trade turnover with the Brics and other friendly nations in response to Trump’s aggressive trade policies.
For the US, responding to this challenge is fraught with risk. One option would be to impose sanctions on countries or institutions that purchase Chinese dollar bonds, but this could backfire by reinforcing the perception that dollar-denominated assets are vulnerable to political interference, thereby accelerating the diversification away from the dollar.
Another approach would be for the Federal Reserve to raise interest rates to make US treasuries more attractive. However, this would simply raise borrowing costs for a US government already grappling with large deficits while facing a potential trade war induced recession. Reducing the budget deficit and paying down debt becomes even more important for the US in this context.
The most drastic option would be to restrict China’s ability to clear dollar transactions, but this could fragment the global financial system entirely, undermining the dollar’s role as the global reserve currency and ultimately pushing countries further towards China’s financial orbit. Russia has managed to conduct trade without the dollar and China might prove even more difficult to isolate. As such, Beijing may be better placed to weaponise the dollar than Washington.
The strong investor appetite for Chinese dollar bonds suggests that if Beijing decided to issue more of them, there would be no shortage of demand. This highlights China’s growing leverage in its economic competition with the US and illustrates how Brics might increase its influence over the global financial system without even having to replace the dollar.
• Shubitz is an independent Brics analyst.
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