Beyond Debt: How China’s Ultralong Bonds Could Reshape Global Geopolitics

Brian Iselin

Commentaries and Op-eds May, 2024

In a bid to revitalize its sluggish economy, China has announced the sale of $140 billion in ultralong bonds. This financial manoeuvre is set in a context marked by declining economic indicators and increasing international tensions. Let’s take a quick look at the nature of ultralong bonds, their implications for China’s geostrategic position, and the potential impacts on its relations with the European Union (EU), the situation in the South China Sea, and the Taiwan Strait.

What are Ultralong Bonds?

Ultralong bonds are government-issued securities that mature over an extended period, significantly longer than the standard 10- or 20-year bonds. China’s recent move to issue such bonds is notable because it is only the fourth time it has done so, with previous instances linked to major economic stresses or initiatives. That already tells us a great deal about China’s ailing economy, as referenced in several of my previous articles.

The Strategic Purpose of Ultralong Bonds

The issuance of these bonds serves several strategic purposes:

  1. Debt Management: By extending the maturity of its debts, China can align its repayment schedule with its long-term economic projects, reducing the pressure on short-term financial resources.
  2. Off-Budget Spending: Ultralong bonds provide a means to fund substantial government spending without immediately affecting the official budget, thus keeping the fiscal deficit in check.
  3. Local Government Relief: Such bonds can alleviate the financial burdens on heavily indebted local governments, providing them with breathing room to stabilise their finances.

These strategic uses suggest that ultralong bonds are a tool for managing both economic policy and underlying fiscal stresses.

Geostrategic Implications

An ailing economy had weighed heavily on Zhongnanhai’s strategic calculus in all conflict zones. As reported in earlier papers, the renminbi trap, the weakening stock market, the real estate collapse, and the harder economic times for the average family have all been restraining China from more aggressive posturing in the most serious conflicts, the South China Sea and Taiwan.

  1. Impact on EU-China Relations

The issuance of ultralong bonds and the strategic economic positioning of China could have mixed implications for EU-China relations. On one hand, a more stable Chinese economy can benefit European exporters and investors. On the other, increased economic autonomy can (will?) lead China to adopt more assertive trade policies, potentially leading to friction with European interests. At a time when trade-protective measures, such as the EU anti-subsidy tariff on EVs, are being levied in a bid to counter China’s trade-distorting measures, the temporary lifting of the debt sword of Damocles will embolden China in their negotiations.

  1. Influence in the South China Sea

Worryingly, a more economically robust China could feel emboldened to reinforce its maritime claims in the South China Sea. Funding from ultralong bonds will indirectly support military or infrastructure spending in the region, exacerbating disputes with neighbouring countries and affecting global shipping routes.

  1. Stance on the Taiwan Strait

The economic confidence boosted by such fiscal measures could also influence China’s policy towards Taiwan. An economically and militarily stronger China may take a more assertive stance in the Taiwan Strait, posing significant implications for regional stability and international relations.

Economic and Political Risks

While ultralong bonds provide a tool for economic management, they are not without risks. These bonds could potentially:

  • Increase Long-term Debt Burden: They are a gamble on economic growth projections. If economic growth does not meet expectations, and frankly China’s recent economic growth has not met expectations, the long-term debt will become unsustainable.
  • Dependency on Debt Financing: Reliance on debt to stimulate the economy might lead to vulnerabilities, particularly if global financial conditions tighten. It exposes China to external influences through the financial markets.
  • Political Risks: Domestically, the increased debt might lead to public discontent if it leads to austerity measures or if perceived as mismanagement by the government.

Issuing ultralong bonds is a significant financial strategy that can have profound implications for China’s economic stability and vulnerability to external influences. Let’s explore how these bonds affect China’s susceptibility to foreign financial manipulation or aggression, and their impact on the renminbi and the Chinese stock markets.

Vulnerability to Foreign Financial Manipulation or Aggression

  • Increased Exposure: By issuing large amounts of debt that will mature over a very long period, China potentially increases its exposure to foreign investors, as these bonds might be held by international entities. This could increase China’s vulnerability to external economic pressures or manipulative practices, especially in times of geopolitical tension. These will be a pressure point for counteracting an otherwise emboldened China.
  • Reduced Immediate Risk: Conversely, by spreading the maturity of its debt over a longer period, China could actually reduce the immediacy of risks associated with refinancing and repayment. This extended timeline may provide China with more leeway to manage its economic policies without being overly susceptible to short-term external financial shocks or pressures.
  • Control and Ownership: If China manages to keep the majority of these bonds within domestic hands or with friendly international entities, the potential for foreign manipulation can be mitigated. The control over who holds these bonds is crucial in managing foreign influence. Let’s see who buys them in the coming six months.

Impact on the Renminbi

  • Currency Stability: Issuing bonds can have a stabilising effect on the Renminbi if it enhances investor confidence in China’s government and financial health. Successful bond issues often signal economic stability and fiscal prudence to international markets. Failed bond issues, on the other hands, signal structural weakness and a lack of confidence in the Chinese future.
  • Potential Depreciation Pressure: There is some risk that issuing large amounts of debt could put pressure on the Renminbi, particularly if global investors speculate against the currency. The influx of bonds could lead to a surplus of Renminbi in foreign hands, potentially devaluing the currency if these holders decide to offload large amounts simultaneously. China could worsen its own Renminbi trap (subject of earlier article).

Impact on the Stock Markets

  • Positive Market Sentiment: The issuance of ultralong bonds will be viewed positively by the stock markets IF investors believe that the proceeds will be used for effective economic stimulus or infrastructure projects that boost economic growth. If markets see – or believe – the funds being used to boost military spending, or more military support to Russia, that will cool investor interest considerably.
  • Diversion of Funds: However, there is a risk that money invested in bonds could divert funds away from stocks, particularly if the bonds offer competitive returns compared to stock dividends. While China’s stock market remains weak, this is a real risk and would dampen the equity market’s performance. China might worsen their stock market trap (subject of earlier article).
  • Long-term Investment Confidence: On a more positive note for China, the government’s commitment to long-term economic projects funded by these bonds could improve investor confidence in the sustainability of the Chinese economy, potentially boosting both direct investment and stock market indices over the longer term.

Overall, while the issuance of ultralong bonds by China introduces certain vulnerabilities, particularly related to foreign holdings of these bonds, it also offers opportunities to stabilize and potentially strengthen the Chinese economy. The key will be how China manages the sale and control of these bonds, as well as the effectiveness of their use in stimulating sustainable economic growth.

So, overall, China’s strategy of issuing ultralong bonds is a complex manoeuvre aimed at stabilising its economy while managing both fiscal and geopolitical challenges. It signals a troubled economy, but also signals the leadership’s confidence they will meet growth expectations during the life of the bonds. The success of this strategy will depend not only on domestic economic management but also on how it navigates international tensions and relationships, particularly with the EU, in the South China Sea, and across the Taiwan Strait. The debt financing will embolden China in all of those conflicts and in trade conflicts as well. How the Chinese people will react to this, if they hear about it, if the money is spent on projects such as infrastructure that bring jobs and boost household income, is yet to be seen. How the money gets spent will decide the next decade of life in China; ailment or remedy.

 

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