PRC lending their USD surplus to countries to buy more PRC shit. "Increases demand for dollar-denominated assets, goods and service" =/= increase demand for US treasury, aka it doesn't fund US deficits. The attack is not on dollar circulation / liquidity but cost of treasury
Old: PRC recycle surplus USD into US bonds, increase US treasury demand, subsidizes cheap US debt.
New: PRC recycle surplus USD into BRI finance, said USD doesn't return to US treasury to buy bonds, decrease US treasury demand, treasury increase interest to fill hole, makes exorbitant privilege more exorbitant.
PRC parallel dollar bond lending COMPETES with US treasury bond lending. PRC dollars gets recycled towards PRC goods / BRI projects, not US treasury. PRC leveraging dollar liquidity for PRC geopolitical interests, meanwhile taking demand away from treasury bond sales, so US drive rates up to compete. US treasury had to find other buyers to fill ~600 billions (and raising) of USD bonds that PRC no longer holds. Filling hole that size = finding more price sensitive buyers (vs PRC who previously default recycled into treasury), so raise interest, increase debt servicing. US 10 year going from 0% (countries basically paying to hold USD) to ~0.8% cost US ~300B+ annually. Now that's not all PRC doing, but 100 billion here and there and soon we are talking about real money.
> attack is not on dollar circulation / liquidity but cost of treasury
No real way this can work between similarly-sized trading economies. Worst case, a couple central bankers' weekends would be ruined.
> PRC recycle surplus USD into BRI finance, said USD doesn't return to US treasury to buy bonds
How? PRC sends dollars into BRICS. What do they do with the dollars? If they aren't sitting on them, they're contributing to the dollar economy.
The PRC financing using dollars would be nuts because it puts their sovereign financing into American hands.
> PRC parallel dollar bond lending COMPETES with US treasury bond lending
Not in any meaningful way. (There aren't that many indisctiminate buyers of international debt anymore. Put another way, most Treasury buyers have and will never buy any Chinese paper and vice versa.)
> US treasury had to find other buyers to fill ~600 billions (and raising) of USD bonds that PRC no longer holds. Filling hole that size = finding more price sensitive buyers
Not really. You fire up the Fed. If it's China that's doing it, that's national security. Hell, sanction the accounts the dollars are going into.
> but 100 billion here and there and soon we are talking about real money
Have you traded Treasuries in an instituional setting? You're talking about the size of a single desk's intraday exposure.
Or you know, a few basis points increase in interest rate that adds up to 100s of billions of new debt obligations a year (now more than defense), but it's America, no one loses sleep over that.
>they do with the dollars
Sign PRC development contracts, which = PRC products. Not US treasury. Dollars circulating =/= dollars going into treasury to finance US solvency.
>meaningful way...
>aren't that many indiscriminate...
>single desk's intraday exposure
Churn =/= net absorption, liquidity =/= funding, which is 2T new issuance per year to cover deficit right now (speed =/= volume of plumbing). The exact vulnerability is not many indiscriminate buyers... and losing a whale like PBOC that was one of them, and their 100s of billions has outsized effect as marginal buyer that closed auction regardless of price. Now they've been replaced by price sensitive buyers which means FEDS raise rates to attract non indiscriminate buyers who buy for yield/valuation not storage to close auctions. Meanwhile PRC lending out their USD which further decrease demand for treasury. Instead of exorbitant privilege of cheap debt, treasury payouts closer and closer to market rate because indiscriminate price takers like PRC out. Structural cost of capital increases when debt velocity and refinancing reach fiscal trap levels.
>using dollars would be nuts
>national security
I mean it's happening, lots of PRC loans / shadow lending / swaplines backed up by their dollars, because it's better for PRC use them to further PRC interests than subsidize US debt. What's national security crisis? PRC not using dollars to buy treasury? AKA US going to announce to world surplus USD now must be mandatory recycled/loaned to US gov or be sanctioned? Are they going to sanction countries for buying PRC tractors and end up increasing USD risk premium even more? The virtue of mechanism is PRC is sustaining US dollar system (which Trumps seems to like, i.e. threaten to sanction countries who goes off), but incrementally stripping dollar strength into liability. There's shit all US can do about it without looking even more delulu and making system worse (granted for everyone). US/Trump still gets to see the privilege of dollar liquidity/churn/circulation, but now they have to pay through the nose for it because PRC marginal buyer not there to keep interest floor down.
Could you explain what do BRICS do with dollars they borrowed from PRC? Buy oil and so the dollars flow to SA. Then what do BRICS do when the dollars loan to PRC is due?
It's not limited to BRICs but many emerging economies or distressed countries PRC wants to gain influence. Dollars attached to specific PRC projects, i.e. BRI, so they buy PRC industrial inputs, goods, equipment, contracts PRC SEOs to build XYZ. It goes from a Chinese bank to a Chinese contractor who buys other shit. But the shit they are not buying is US treasuries, and even if they did, not at PBoC/central bank for storage low yield rates that subsidizes US debt. Sometimes there's more generalized debt servicing swaplines, but regardless When dollars come due, PRC can take rmb/commodities/assets (rarely aka debt trap). If borrowing countries payback in USD, then cycle repeats. PRC is basically exploiting UDS network / liquidity effects without paying exorbitant privilege. Well they do pay, as in they take on lending risks, but their USD reserve is inherently not safe anymore post RU sanctions, so might as well as use it now.
Old: PRC recycle surplus USD into US bonds, increase US treasury demand, subsidizes cheap US debt.
New: PRC recycle surplus USD into BRI finance, said USD doesn't return to US treasury to buy bonds, decrease US treasury demand, treasury increase interest to fill hole, makes exorbitant privilege more exorbitant.
PRC parallel dollar bond lending COMPETES with US treasury bond lending. PRC dollars gets recycled towards PRC goods / BRI projects, not US treasury. PRC leveraging dollar liquidity for PRC geopolitical interests, meanwhile taking demand away from treasury bond sales, so US drive rates up to compete. US treasury had to find other buyers to fill ~600 billions (and raising) of USD bonds that PRC no longer holds. Filling hole that size = finding more price sensitive buyers (vs PRC who previously default recycled into treasury), so raise interest, increase debt servicing. US 10 year going from 0% (countries basically paying to hold USD) to ~0.8% cost US ~300B+ annually. Now that's not all PRC doing, but 100 billion here and there and soon we are talking about real money.