China Decode: Why China Keeps Selling U.S. Treasuries

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1:52James Kynge:I just think that it's super interesting at a macro level. that these two countries, because of trade and strategic alignment, have come closer and closer. And it's sort of Kissinger's nightmare, right? We're living in a kind of reverse 1970s where Russia and China are getting closer together rather than the U.S. getting closer to both Russia and China individually.

2:17James Kynge:Welcome to China Decode. I'm Alice Han.

2:19Alice Han:And I'm James King.

2:20James Kynge:In today's episode of China Decode, we're discussing the future of a gas pipeline between Russia and China, China's massive sell-off of US treasuries, and the world's first commercially approved brain chip. All right, let's get right into it. Russian leader Vladimir Putin visited China just days after President Trump left his own bilateral summit in the country. A centerpiece of the agenda was the long-stalled Power of Siberia 2 pipeline, a proposed 1 ,615-mile pipeline that would carry up to 40 billion cubic meters of natural gas annually from Russia into the industrial heartlands of China. So far, no deal has been announced post-summit, but a spokesperson says a general understanding between the two leaders was reached.

3:08James Kynge:James, this obviously happened right after Trump's own trip to China. We knew this from the get-go. Obviously, the two leaders, Putin and Xi, have a very strong relationship that dates back decades. This is Putin's 25th visit, which is hard to believe, to the country. No other leader at the world stage has met with Xi Jinping as many times as Putin and vice versa. What was your readout on the meeting between these two leaders? And why, more importantly, has this gas pipeline, which should be strategic to both sides, been stalling?

3:41Alice Han:Yeah, I'll come to the gas pipeline in a minute. it's a monster. It's a huge deal. But I think, you know, the big picture here is that what we're seeing is the axis of authoritarianism in action. This kind of bromance between Putin and Xi is really striking. And I've been looking at the fact that since Russia's invasion of Ukraine, we've seen these two big powers draw together much, much more closely. That includes diplomatically, economically, but also militarily. And that's why it really matters for the world. I would say, actually, that the sort of closeness that we've seen between Russia and China since the Russian invasion of Ukraine is probably the most consequential geopolitical shift that we've seen in the world over the last decade.

4:34Alice Han:I mean, I know there are several competitors for that title, but this one is really big. On the one hand, we have a superpower, China. On the other, a big power, Russia. Their combined population is about 1.55 billion people, vast territories. It's the second and the ninth largest economy. And both of these countries are nuclear weapons powers. So, you know, this is really important. For the US, I think it's particularly key because China used to be a rival, perhaps an adversary of the US, but now China and Russia together makes a much bigger adversary to the US. And China and Russia have not attempted to hide their opposition to the US.

5:22Alice Han:As you mentioned, just a few days after President Trump left, Xi and Putin were warning that a global return to, quote, the law of the jungle would be a risk for the world. And this is a clear reference to the US attack on Iran and Venezuela. So this is an axis of authoritarianism, in my view, and it's clearly oppositional to the United States. For Europe, obviously, this has been a major problem. I mean, Russia casts such a long shadow over Europe in terms of its economic politics, as well as its military threat, that China and Russia together creates a much more formidable player for Europe to conjure with.

6:10Alice Han:And now I get back to the power of Siberia 2 pipeline, because the key glue in the Russia-China relationship is effectively hydrocarbons. And among hydrocarbons, natural gas is probably the most important. We've seen Russia and China build the Power of Siberia 1 pipeline. That's taking natural gas from Russia to China. But this Power of Siberia 2 pipeline, if it is built, would be 2 ,600 kilometers long, cost up to 34 billion US dollars to build. It's an absolute monster. And what it would mean is that China would be the customer of up to 50 % of Russia's exports of natural gas. That's equivalent to what Russia was exporting to Europe before the Ukraine war, but now the exports to Europe have sharply declined.

7:09Alice Han:And so we can see in these pipeline politics, the real shift in orientation of Russia from a Europe facing power before the invasion of Ukraine to what is now the case, it is now a China facing power. So that's why this power Siberia pipeline, I think is so crucial. It shows the fundamental geopolitical shift of one of the most important European and Asian powers. That's Russia away from Europe and towards China. But what did you make of it, Alice? What did you make of the big bromance between Xi and Putin in Beijing?

7:48James Kynge:Well, it was clear as soon as Putin landed that he's very well-liked in China. He was greeted by the foreign minister Wang Yi as opposed to the vice president Han Zheng, and they were very cordial with each other. He had a very confident gait as he came down the tarmac when he landed. And it's clear that this relationship between Putin and Xi is a personality-driven one. They clearly have, I think, a deep affection and respect for each other. But going beyond that is the amount of trade coupling that has happened between Russia and China since the Ukraine war began. So trade between China and Russia has basically doubled from 2020 to 2024.

8:30James Kynge:That is, to your point, mainly driven by hydrocarbons, oil and gas. China increased its imports even this year of Russian oil by 35 percent, and total trade is up nearly 20 percent. And more importantly, Russia is China's largest single source, I mean, country-wise of crude oil. That's about 20 percent of its crude oil imports. So in a period in which we've seen China being on the chopping block in terms of de-risking and decoupling, it seems like we've seen something in the reverse strain, which is a coupling between Russia and China on the trade front. And we haven't mentioned on technology as well.

9:05James Kynge:You know, we see in the data a lot of Chinese exports of semiconductors, of autos, of trucks, of drones going into Russia or drone components, even though technically the These should not be allowed based on the sanctions regime in place. But right now, I think the thing that is really stalling the pipeline, and I'm curious to get your thoughts on this, is about pricing. It seems like at the strategic level, the leaders love each other. The relationship is great. But what is holding this pipeline back, which is going to be considerable in terms of the energy flows of gas from Russia to China, is the fact that the two sides can't agree on who's going to foot most of the bill.

9:47James Kynge:So according to some reports, China is reportedly looking for pricing that is about half of what the Russians are expecting in terms of the power of Siberia too. And I think this is somewhat stalled because ultimately the two sides can't really agree on pricing. It remains to be seen if there's enough pressure to get this going because of what's happening in the Middle East. But right now, as someone who looks at the China energy situation, it seems like the Chinese went into the conflict in Iran long in terms of supply of LNG, of gas. Their reserves have not been as depleted as their crude oil reserves.

10:28James Kynge:So maybe in the short term, there isn't an impetus to really push this pipeline forward. We shall see. I just think that it's super interesting at a macro level that these two countries, because of trade and strategic alignment, have come closer and closer. And it's sort of Kissinger's nightmare, right? We're living in a kind of reverse 1970s where Russia and China are getting close together rather than the US getting closer to both Russia and China individually.

10:55Alice Han:Yes, so right, Alisa. I think price is one of those things that always tells the true story, isn't it? The truth of this relationship is that although people talk about it as the Chinese government once wrote, a no-limits partnership between China and Russia, the truth is that under the surface, there is considerable tension. There always has been. There is right now. And in my view, there is likely to be for the foreseeable future. And the way the Chinese are driving such a hard bargain over the price of the natural gas that it would import from Russia, it really speaks to the tensions in the relationship.

11:37Alice Han:China knows it's got Russia over a barrel because of the way that Europe has slashed its hydrocarbon imports from Russia since Russia invaded Ukraine. China is about the only big market that Russia can export this natural gas to. And that means the Chinese know that they can afford to tell the Russians to cut the price and cut it really substantially. And I think it's quite interesting that neither side was able to agree a price and therefore the future of the power of Siberia to this huge pipeline itself. Well, it's not approved yet. I guess we all think that it will get approved. Somehow the two sides will agree on a price, but we have to keep on watching for that.

12:25James Kynge:OK, we'll be back with more after a quick break. Stay with us.

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16:01James Kynge:Welcome back. The war in Iran triggered a global sell-off of U.S. Treasuries starting in March, and China was no exception to those joining the off-rep. The sell-off is motivated by the need to liquidate reserves of the U.S. dollar to help defend against the energy shock that began with the Middle East conflict. The yield on the 30-year US Treasury note is now at 5.2%, the highest level since pre-global financial crisis levels in 2007. James, I know this is a bit of a wonkish topic, but ultimately, you know, telling people out there the bond market matters more than the stock market, which is why Trump last year was motivated by Treasury yields soaring rather than stock market tanking and had to move back on his liberation tariffs.

16:49James Kynge:And, you know, I think this is such an important piece to note because at the end of the day, the 30-year treasury, and the U.S. is a global reserve currency, so this is an extremely important thing, not just for the U.S., but also for the world. The 30-year is an important signal of inflation, growth expectations. It's also things that mortgages in the U.S. are pegged at. But, you know, it can't be understated how important the 30-year yield is and the curve of the U.S. Treasury. Right now, it's crazy that we're north of 5%. We haven't seen these levels since 2007. For some people who are screaming recession, this is yet another indicator that we are fast approaching that, driven by the energy shock from the Middle East.

17:33Alice Han:Alice, are you saying effectively that the U.S. borrowing costs, when it issues these long bonds have increased because China is buying fewer of these bonds than it used to in the past. Is that the dynamic here?

17:49James Kynge:Well, we can go into the minutiae of the data in just a bit, but I think this is a global phenomenon. You know, late last year, we saw gold asset holdings in FX reserves globally amongst central banks surpassed, this is the first time since the 1990s, surpassed U.S. denominated treasury holdings. So we saw that close to$4 trillion of gold held by not just PBOC, but other central banks around the world, because people were not so sure about, A, the debt sustainability of the U.S. We've got public debt to GDP in the U.S. now north of 120 % and rising, and unclear about the U.S.'s role as the world number one, the world hegemon.

18:34James Kynge:And so there are recurring questions you get. There's a lot of panels, I'm sure, that you and I get invited to about whether or not China will overtake the U.S. in terms of reserve status. But we're starting to really get, I think, consternation amongst central banks around the world about the debt sustainability of the U.S. and the strength and reserve currency status of the dollar. And certainly, I think what has happened even more since the conflict in the Middle East erupted is that you're seeing a lot of central banks now trying to sell down UST bills to get cash to buy as much oil as they can and at whatever price because we're so supply constrained.

19:18James Kynge:That, I think, is a global phenomenon. But certainly, we are starting to see in the last year or so that China has been selling down some of its treasury holdings, at least what's publicly available in the data set. Still about 50 % of the FX reserves at around$3 trillion are in US bonds. But I've seen noticeably since the Russia-Ukraine war broke out, since we started to see FX sanctions on Russia in 2022, that China has been diversifying on the margin by increasing its currency exposure to other currencies, but also its exposure to gold and commodities. But how do you see this?

19:55Alice Han:Very interesting. Yeah. I mean, China's big problem has always been that it has a huge trade surplus. Every year, I mean, last year, it was a record in history, I believe, certainly for peacetime, 1.2 trillion US dollars. And it's got to put those dollar earnings somewhere. So it puts them in its foreign currency reserves. They're also held in different packets, in state-owned banks, etc. But just for simplicity's sake, they go into the foreign currency reserves. And then China has the question, how do they invest such an enormous amount of money in dollar-denominated assets somewhere around the world?

20:32Alice Han:That's the key problem that they have. And so in the past, their answer was, well, we'll buy US Treasuries because there is enough US Treasuries. We can sink trillions into the US Treasury market. But as you say, according to the US government data, it looks like China's been selling down its holdings of Treasuries quite substantially over the last few years. And this does tend to raise questions over the sustainability of the dollar's dominance over the financial system. I wouldn't put it any more categorically than that. I would just say that it raises questions. I'm not making any bold predictions here.

21:13Alice Han:These are very complicated flows. The other thing I'd like to point to is the possibility that the selling down of US treasuries by China over the last few years is primarily a data function. It's primarily what the US government data is showing. And it might not fully reflect what's happening in actuality, because I think there's a number of leading scholars out there, including Brad Setzer. And he is saying that China buys a lot of US treasury bonds through Belgium. But we just don't know how big that portion is because it's not transparently reported. So I think we have to have a little bit of a caveat on how deep the selldown of U.S.

22:01Alice Han:treasuries by China has been. But I think it's a fascinating topic, Alice. And I really believe that if we look at the renminbi versus the U.S. dollar over the next five years and their relative strength in the global economy, we're going to see many interesting trends. Yeah.

22:19James Kynge:And just to backtrack a little bit, firstly, I love Brad Setsch's work. He's one of the best when it comes to balance sheets, trade balances, capital account balances. And he mentions that it's not just Europe through Belgium, it's also potentially Canada and Cayman Islands. There's some of these shadow holdings in these other custodial banks, which hold these T-bills that are not reflected in the public data set, to your point, James, in Chinese PBOC FX reserves. But I think what is useful to point out about the relevance of FX reserves to currency, to trade, to geopolitics, is the fact that, you know, in the past, I would say really before COVID in particular, you saw China really build up an FX war chest, so to speak.