Why You Shouldn’t Buy Chinese Bonds, and What You Should Buy Instead

Shah Gilani Nov 25, 2020
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Hypocrisy is everywhere, even in U.S. capital markets.

Maybe it’s because U.S. capital markets aren’t really “free markets” anymore, meaning they’re manipulated by the Federal Reserve, by so-called investment banks, by fund sponsors selling thematic products that aren’t true to their mandates, and by institutionalized greed.

Now U.S. institutions are buying Chinese government bonds directly from China. Talk about hypocrisy.

American investors shouldn’t buy Chinese government bonds (CGBs), no matter how tempting they may look, nor should our supposed allies in Europe for that matter, for a lot of reasons.

Here’s a short list of them and what China’s really trying to do and succeeding in doing…

The Problem of Blind Greed

A month ago, China’s Ministry of Finance equaled 2019’s record issuance of dollar-denominated bonds, selling another $6 billion worth of CGBs, mostly targeting American interests. The four-part issue of 3-year, 5-year, 10-year, and 30-year maturities was well received, despite low interest rates.

The 3-year notes yielded a mere 0.25 percentage points over comparable U.S. Treasuries. Bonds due in 2050 yielded 0.8 percentage points above comparable 30-year Treasuries, with 47% of the 30-year $500 million issue sold directly to U.S. investors.

Those are some pretty low yields considering China’s sovereign debt is rated A+ by S&P Global and A1 by Moody’s Investors Service, the same ratings as Chile, Estonia, Latvia, Japan, Slovakia, and Lithuania, while U.S. debt is rated AA+.

But those rates were downright juicy compared to rates European investors were offered a week ago.

Having succeeded in selling Americans a tidy amount of dollar-denominated CGBs, China’s Ministry of Finance offered European investors $4.74 billion worth of Euro-denominated CGBs. The three-part issue of 5-, 10-, and 15-year maturity bonds was oversubscribed by 380%, meaning bids totaling more than $18 billion were submitted for the bonds. Not because the interest rates offered were attractive either.

The 5-year notes were priced to yield NEGATIVE 0.152%, meaning European investors were paying the Chinese government for the privilege of lending them money. The 10-year rate was 0.318% and 15-year bonds yielded 0.664%.

To European investors, Chinese piddling yields, including negative-yielding bonds, are better than what they get when they buy European Union countries’ bonds. Germany’s 5-year bunds, for example, sport a yield of NEGATIVE 0.749%. European bonds account for a big chunk of the more than $16 trillion of global bonds trading at negative yields, according to the ICE BofA Global Bond Market Index.

Are foreign investors that greedy that they’ll finance China for a few basis points over their own countries’ bonds? Apparently, they are.

European and American investors are going to be buying a lot more Chinese government bonds in the future, thanks to purveyors of global bond indexes increasingly including Chinese bonds in benchmark indexes investment funds and pools are weighed against, and of course, Chinese efforts to sell more of their debt to Americans and Europeans.

That’s a problem.

Not because greedy index purveyors make more money including Chinese bonds that more global investors are being benchmarked against, or that institutions buy those bonds, trade them, sell credit default swaps against them, and slice and dice them to butter their own bread – that’s just institutional greed.

The problem is this greed is blind, dangerously so.

What China Wants, China Eventually Gets

China selling its debt on global markets, especially to American and European institutions, isn’t just about China financing its expansion, or mitigating the extraordinary internal leveraging of its domestic debt markets, or even saddling foreign investors with bad debts when investors go beyond buying government debt and buy Chinese state-owned-enterprises’ (SOEs) debts, three of which defaulted on their debts last week.

While it might look like the Chinese are just working greedy investment banks and trading houses’ appetite for debt that can be sliced, diced, structured, tranched, sold, and traded for huge profits, there’s a lot more going on behind the curtain.

That real reason China’s pushing its debt onto global markets is China wants to embed its interests into global markets so Chinese bonds become “acceptable collateral,” so American and European institutions buy more renminbi to pay for what will be more Chinese debt issued in Chinese-denominated currency.

That supports the renminbi and depresses the dollar and euro (as they are sold to buy renminbi to buy renminbi-denominated debt), which will eventually make China’s renminbi a reserve currency that challenges dollar hegemony and U.S. economic power, and supports Chinese sovereign debt as acceptable collateral across international markets, just the way the dollar is now the only global currency every country accepts, just as U.S. Treasuries are accepted as good collateral everywhere.

That’s the endgame.

China selling CGBs to American and European institutions is a Trojan Horse; it’s how China’s going to extend its economic power and undermine the last remaining superpower in its way.

China is a growing power, and its government, as unpalatable as it is in its authoritarian ways, deserves credit for the remarkable growth of what twenty years ago was a “third world” country.

Americans, however, should never forget that growth was aided and abetted in large part by the egregious, criminal theft of American technology and know-how.

There’s no turning back the clock on successive American governments, with one exception, turning a deaf ear to cries of theft; but there is time to stop China from infiltrating global debt markets and undermining the U.S.

Don’t buy Chinese bonds. And tell your Congressmen and women to do something about it.

If they want to know what they should do, I’ll tell them.

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Sincerely,

Shah

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