Wang Yongli clarifies China's issuance of USD-denominated Sovereign Bonds in Saudi Arabia
Former VP of Bank of China rebuts chest-thumping exaggeration in Chinese social media that is "harmful and counterproductive."
Dr. Wang Yongli was the former Vice President and Executive Director of Bank of China, one of China’s big four banks. He was also the first Mainland Chinese member of the board of SWIFT, the key messaging network that allows individuals and businesses to send and receive international payments.
In China’s public discourse, Dr. Wang, through his WeChat blog and other public engagements, stands out as a persuasive, effective, and cool-headed opinion leader. His fact-based, experience-informed, and logic-driven analysis doesn’t shy away from countering the often ill-informed, chest-thumping exaggeration and self-congratulation in China.
I have featured his writings twice in Pekingnology. Earlier this week, Fred Yingshi Gao, over at his Inside China substack and upon my encouragement, highlighted Dr. Wang’s authoritative analysis of the relationship between China’s Cross-border Interbank Payment System (CIPS) and SWIFT, providing badly-needed insight on a subject that has been hyped out of proportion both in and outside China. - Zichen Wang
Below is Dr. Wang’s recent analysis of China’s USD-denominated sovereign bond sale in Riyadh, Saudi Arabia, on November 13, 2024, which has been ridiculously billed as a “fatal blow” to the U.S. in Chinese social media. Dr. Wang’s brief but commendable rebuttal was published in his WeChat blog on December 3.
王永利 |对中国在外发行美元主权债券不可肆意解读
Wang Yongli | China’s Issuance of US Dollar-denominated Sovereign Bonds Abroad Should Not Be Overinterpreted
China's first sovereign dollar bond issued and listed in the Middle East has been very successful, fully demonstrating international investors' high recognition of China's sovereign credit.
On November 14, 2024, the Ministry of Finance said:
On November 13, local time, the Ministry of Finance of the People's Republic of China, on behalf of the central government, successfully issued a $2 billion sovereign bond in Riyadh, the capital of the Kingdom of Saudi Arabia. Of this, $1.25 billion was issued with a 3-year term at an interest rate of 4.284%, and $750 million was issued with a 5-year term at an interest rate of 4.340%.
The sovereign dollar bond issuance was warmly welcomed by the market, with international investors showing strong interest. The total subscription amounted to $39.73 billion, 19.9 times the issued amount. The 5-year bond had a subscription multiple of 27.1 times, the highest in recent years for global sovereign bond issuances. The issuance interest rates for the 3-year and 5-year sovereign dollar bonds were 1 basis point and 3 basis points higher, respectively, than those of US Treasury bonds with the same maturity, setting the record for the lowest interest rate spread in the dollar bond market.
This issuance of US dollar sovereign bonds attracted a diverse range of investor types and a broad geographical distribution. Investors from Asia, the Middle East, Europe, and the United States accounted for 68%, 8%, 20%, and 4%, respectively, with the proportion of investors from the Middle East reaching a historic high. In terms of investor types, sovereign entities, banks, fund managers, insurance companies, and dealers accounted for 9%, 50%, 37%, 2%, and 2%, respectively.
The bonds issued in this instance will be listed on the Hong Kong Stock Exchange and Nasdaq Dubai.
This is China’s first sovereign US dollar bond issued and listed in the Middle East. The issuance results can be considered a great success, fully demonstrating the high recognition of China’s sovereign credit by international investors. It is truly a cause for celebration!
However, some on social media have excessively hyped this otherwise routine sovereign bond issuance abroad. Many influencers have published articles or videos offering misguided interpretations that ignore the facts, which has caused significant public response and confusion. For example:
The U.S. dollar is the sovereign currency of the United States, and only the U.S. government can issue sovereign dollar bonds. However, this time, China has taken business away from the U.S. government and disrupted the dollar's circulation loop (creating an alternative flow), which they claim is a fatal blow to the U.S. dollar, the Federal Reserve, and the U.S. government;
China holds over $3.2 trillion in foreign exchange reserves, so it certainly doesn't lack foreign currency. So why issue a $2 billion sovereign bond in Saudi Arabia? This is part of a highly strategic move by China. By issuing bonds in the Middle East, China aims to attract the region's abundant petrodollars, traditionally funneled into U.S. assets, and redirect them toward China. The issuance scale could potentially grow (e.g., $20 billion, $200 billion), reducing their reliance on U.S. Treasury bonds.
China could use the funds raised to invest in Belt and Road Initiative (BRI) countries, or to help these countries reduce their dependence on U.S. and Western currencies and debt,helping them free from control and exploitation by the West. This would strengthen solidarity and cooperation among developing countries. Furthermore, China could request repayment of these funds in energy resources or other commodities, or even in renminbi, promoting the internationalization of the Chinese currency. This would bolster China's influence and voice in the global financial system.
Issuing U.S. dollar sovereign bonds in Saudi Arabia by China is indeed an important economic strategy, as well as a subtle diplomatic maneuver. It strengthens financial ties and economic relations with countries like Saudi Arabia, gradually promoting the diversification of the global financial ecosystem. This seems to be a kind of Chinese "taiji" strategy, using minimal effort to shift the dominance of the U.S. dollar in ways favorable to China, allowing it to benefit from the advantages of U.S. dollar hegemony. The Chinese dragon has truly awakened!
The above interpretations are clearly serious deviations from the facts!
Firstly, it is normal for a government to issue sovereign bonds in international currencies, such as the US dollar or euro, in overseas markets based on financial needs. This routine financial activity does not involve "stealing business" from the currency issuer, challenging its monetary sovereignty, or threatening its central bank or national security.
China has been issuing foreign currency-denominated sovereign bonds abroad since 1987, and the volume of such issuances increased significantly starting in 2017. For example, on November 6, 2019, the Chinese government issued €4 billion in sovereign bonds in Paris. On November 2, 2019, it issued $6 billion in sovereign bonds in Hong Kong. On November 10, 2021, another €4 billion in sovereign bonds were issued in Hong Kong. And on September 23, 2024, China issued €2 billion in sovereign bonds in Paris. This clearly shows that issuing foreign-currency sovereign bonds abroad is not a rare or unique occurrence!
Of course, the choice of where to issue foreign sovereign bonds is a decision that requires careful consideration. Generally, it is essential to assess the potential for raising funds in that market and the convenience of doing so, in order to ensure that the target amount of funds can be raised at a relatively favorable cost. Additionally, the bonds need to be listed and circulated in the market to enhance their appeal to investors and strengthen support for the listing market.
As a result, China tends to favor issuing sovereign bonds in locations like Hong Kong, which helps support Hong Kong's status as a global financial hub. China has also considered other friendly markets, such as historically issuing sovereign bonds in local currencies in countries like the U.S., Japan, and Germany, and listing them in those local markets.
Secondly, although the sovereign bonds were issued in Riyadh, Saudi Arabia, the investors were not solely from Saudi Arabia. They came from various regions, as the Ministry of Finance disclosed: 68% of investors were from Asia, 8% from the Middle East, 20% from Europe, and 4% from the United States. The proportion of Middle Eastern investors reached a historic high (it's important to note that investors from the Middle East also participated in sovereign bond issuances in places like Hong Kong and Paris). Of course, choosing to issue bonds in Saudi Arabia and listing them in Hong Kong and Dubai also significantly strengthens economic and diplomatic relations with Saudi Arabia and Dubai.
Lastly, the Ministry of Finance has not talked about the use of the funds raised through this sovereign bond issuance. Claims that the funds are intended to attract Middle Eastern petrodollars for Belt and Road investments or to replace the debts of related countries to the West are entirely unfounded and irresponsible speculation. Such statements mislead public understanding of sovereign bond issuances and risk stirring unnecessary international tensions. These narratives are harmful and counterproductive, and it is essential to curb them to restore clarity and ensure accurate understanding!
From the archives of Pekingnology
From Fred Gao’s Inside China
 | A guest post by
|