China Watch: Forget About the BRICS Currency - China Wants to Impact the USD from Within

The Chinese issuance of USD-denominated bonds in Saudi Arabia may seem negligible on the surface, but it holds significant signal value for the direction of the USD, Gold and the BRICS project.

Last week, we learned about an intriguing story that several clients have asked us to explore.

China issued $2 billion worth of USD-denominated bonds, which might not seem groundbreaking at first glance—it’s not uncommon for China to issue bonds in dollars. However, two aspects of this issuance stand out:

1. The Venue: These bonds weren’t issued in the typical financial hubs like New York or Shanghai but in Riyadh, Saudi Arabia—a first of its kind.

2. Astronomical Demand: The bonds were oversubscribed 20 times, with a bid-to-cover ratio far exceeding typical U.S. Treasury auctions, where demand usually runs 2-3 times the issuance amount.

Even more remarkable is the pricing. These bonds trade near par with U.S. Treasuries, meaning their yields are almost identical. This is noteworthy because U.S. Treasuries are rated AAA, while China’s USD-denominated sovereign bonds are rated A+, a lower credit grade. Typically, A+ issuers’ bonds trade at a premium of 10-20 basis points (bps) above U.S. Treasuries, but China managed to issue these bonds at just 1-2 bps above, effectively securing dollar funding at near-parity with the U.S.

Why Does This Matter?
While the $2 billion issuance is insignificant in the grand scheme of global finance, its implications are fascinating. If China can replicate this "glitch" repeatedly, it could begin to influence dollar liquidity flows, effectively acting as a foreign “Michael Saylor” of dollars. In other words, China could create a mechanism to exercise influence over the global dollar market while advancing its broader strategic goal of yuan internationalization.

Furthermore, this story holds strong signal value regarding the USDCNY exchange rate. China would likely not be increasing USD bond issuance if it had plans to weaken the CNY—something we and others have highlighted as a key risk throughout the year.

Perhaps this marks a shift in strategy: rather than focusing on the laughable BRICS currency project, China may now aim to weaken the USD from within.

Chart 1: The “You Shall Not Pass” Policy Remains Focal in China on USDCNY

In the following sections, we’ll delve deeper into the details of this issuance and explore its potential implications.