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

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So why not you? Try Odo for free at Odo.com. That's OdoO.com. - 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 kiss and just nightmare, right? We're living in a kind of reverse 1970s where Russia and China getting close together

rather than the US getting closer to both Russia and China individually. - Welcome to China decode, I'm Alice Hen. - And I'm James King. - 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 two 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.

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 she 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's stage has met with shooting ping as many times as Putin and vice versa.

What was your read-out on the meeting between these two leaders and why more importantly has this gas pipeline which should be strategic to both sides been stalling? - Yeah, I'll come to the gas pipeline in a minute. It's a monster, it's a huge deal.

But I think the big picture here is that what we're seeing is the access of authoritarianism in action this kind of bromance between Putin and sea 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 there's 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.

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,

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 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, 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 access 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 is such a large shadow over Europe in terms of its economic politics, as well as its military threat, that China and Russia together create a much more formidable player for Europe to conjure with.

And now I get back to the power of Siberia to 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 one pipeline. That's taking natural gas from Russia to China. But this power of Siberia two pipeline, if it is built, would be 2,600 kilometers long.

A 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. 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 of 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 sea and Putin in Beijing? 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 Jung. And they were very courtee all with each other. He had a very confident gate 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.

That is to your point, mainly driven by hydrocarbons, oil, and gas. China increased its imports even this year of Russian oil by 35% and total trade is up nearly 20%. And more importantly, Russia is China's largest single source,

I mean, country-wise of crude oil, that's about 20% 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. 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 this 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 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,

on who's going to foot most of the bill. 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. 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 kissing just nightmare, right?

We're living in a kind of reverse 1970s where Russia and China get in close together, rather than the U.S. getting closer to both Russia and China individually. - Yeah, so right, Alessai.

I think prices, 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, you know, 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. 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 now this side was able to agree a price and therefore the future of the power side area 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. - Okay, we'll be back with more after a quick break, stay with us. (upbeat music) - Support for the show comes from Ship Station.

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That's LinkedIn.com/scot. Terms and conditions apply. Welcome back. The war in Iran triggered a global sell-off of U.S. Treasury starting in March

and China was no exception to those joining the off-rap. 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 U.S. 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 one-chish topic

but ultimately, I'm telling people out there,

the bottom market matters more in 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.

“And 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. 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.

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? Well, we can go into the minuter 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 among 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. as role as the world number one, the world hedgemon. And so there are recurring questions.

You get this little 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 U.S. T. bills to get cash to buy as much oil as they can. And at whatever price because there were so supply constrained. 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 that are run three trillion dollars are in U.S. bonds. But I've seen noticeably since the rush Ukraine war broke out,

since we started to see FX sanctions on Russia in 2022,

its currency exposure to other currencies. But also it's exposure to gold and commodities. But how do you see this? - 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 record in history, I believe, certainly for peacetime, 1.2 trillion U.S. 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 and in state-owned banks, et cetera. But just for simplicity, 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?”

That's the key problem that they have. And so in the past, their answer was well, we'll buy U.S. treasuries, because there are enough U.S.

treasuries we can think, you know, trillions

into the U.S. treasuries market. But as you say, according to the U.S. 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 dollars dominance over the financial system. I wouldn't put it anymore categorically than that. I would just say that it raises questions. I'm not making any bold predictions here.

This is these are very complicated flows. The other thing I'd like to point to is the possibility that the selling down of U.S. treasuries by China over the last few years is primarily a data function.

It's primarily what the U.S. 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 Setser. And he is saying that China buys a lot of U.S. treasuries 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 sell down of U.S. treasuries by China has been. But I think it's a fascinating topic, Alice. And I really believe that if we look at the Remymby 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, and just to backtrack a little bit, firstly, I love Brad Setser'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 came to the Netherlands. There's some of these shadow holdings in these other custodial banks,

which hold these two 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, in the past, and would say really before COVID in particular, you saw China really build up an FX war chest, so to speak. They had large holdings, even larger than today, probably closer to 4 trillion at its peak.

And the idea was that you would sell CNY to buy more FX foreign currency holdings so that you could depreciate or devalue your currency relative to the dollar relative to other currencies. And that's relevant because historically,

they've weaponized the FX reserves in order to achieve a degree of currency devaluation. Now we're seeing a currency appreciation, which I think is a regime shift that I've noticed in the last year or so.

And part of that, I think, is largely driven by dollar weakening against pretty much all the currencies. And the FX reserves announced pretty stabilized in general. They're not as much manipulating in the FX reserve market. But I've seen a willingness to let the CNY appreciate

against the dollar. And I think that that has been an interesting shift. Do you think that that is driven by the geopolitics of the relationship or driven by China's different model when it comes to its currency in the export domain?

- I think it's driven by both.

“And I think it's a very important trend.”

I wouldn't want to overstate it. But I would say the Chinese Remin B is likely to appreciate gradually over a period of a number of years. I mean, I don't know, three, four, five, six years, something like that.

And I think the reasons for that are,

first of all geopolitical China's very cognizant

of the fact that Europeans, countries, and and the US are constantly blaming China for its enormous trade surplus.

to appreciate in order to buy more from abroad

“and maybe take a little bit of the pressure off”

in terms of the competitiveness of its exports.

So I think that's a crucial trend here.

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Welcome back to yet another technological breakthrough

that's causing a star in China and around the world. The country just became the first to approve a brain chip for commercial use and implant embedded into the brain to help people with spinal cord injuries. The brain, computer interface, is made

by the Shanghai-based company Neurocool Medical Technology, which for context, is a possible rival to Elon Musk's Neuralink startup. James, we're already living in the future. The images of this are phenomenal.

What is your take on this? How successful can they be?

“And should we be worried about Elon Musk's Neuralink?”

Well, I mean, Alice, honestly, every now and again, a story comes along that is truly mind-blowing. And without using hyperbole, I really think this is in that category.

This is sci-fi made manifest. I was just looking back at the movies to see how many times this theme has cropped up in the movies. I somebody having their brain wired up to an electric pulse or to have a chip in their brain.

There was a 1995 film in which the piano Reeves character had an overloaded brain implant that was used to smuggle highly confidential information to mega corporations. But if we go back to 1962,

there was a film a movie in which a mad scientist keeps his wife's severed head alive by wiring it up to an electric current. I mean, that's rather gruesome. But we're not talking about that here.

But we are talking about something truly amazing,

which is a coin-sized chip, which is in this case called Neo, that is inserted inside the skull, just on top of the brain membrane. And it's used to help people with spinal cord injury.

and then it translates them into a way that can be understand by a computer. And then it's used to, for instance, power a robotic glove so that the person with the brain injury or the spinal cord injury is able to grasp objects

and manipulate this robotic hand. So effectively, in one sentence, what it does is, this chip reads the thoughts of the patient. So the patient thinks, pick that thing up, that thing that's on the table, pick it up now.

And this chip will read that thought and send a signal to the robotic arm that will pick the thing up. I mean, this is just quite extraordinary. And the other thing about this is,

“which is almost equally extraordinary, I think,”

is that the Chinese government is taking this very seriously. It's not taking it as some sort of woo-woo technology that might exist at some point in the future. Oh, no. This is identified as a national strategic priority.

This is a brain computer interface. And it just shows, I think, how forward-looking China's government is on its scientific agenda. The Chinese government has unveiled a 17-step roadmap to establish a global lead in the brain computer interface

industry by 2030.

And at it, it's allocated $1.7 billion to an industry fund

to help finance breakthroughs in this regard. So one of the applications that is being developed at the moment by a company called Neuro-Access is something that has successfully turned thoughts into real-time speech in Mandarin Chinese.

So in other words, somebody with a brain injury, they or some kind of other impediment, they can't speak what they're thinking. This new technology will read their thoughts and allow a computer to speak their words

or to write their words. I just think we've crossed the matrix here, Alice. We are into totally new territory. What do you think? That's really fascinating to me

is the whole approval process between China, versus the US. Part of the reason that the Chinese have pulled ahead

“is that they've just got faster approval timings, right?”

So Musk's Neurolink is the closest to commercializing in the US, but it's still in clinical trials with around 21 participants as of this January. There are some other companies in the mix as well, but the US FDA seems, they've been cautious

about the approval for these brain chip interfaces. Then they rejected Neurolink's application 2022, but Chinese approval agencies have just been faster to commercialize this, because they're really trying to build an ecosystem,

a research talent data collection ecosystem around this. What are some of the drawbacks do you think of the Chinese methodology of this? And how feasible is it for China to say, start exporting this to other markets in five, 10 years time?

- Well, that's great question.

I mean, I think the first point is that it shows,

“I believe, anyway, that China is much less squeamish,”

or you might say, sensitive about approving this type of technology. So this was approved for commercial use in China in March by the National Medical Products Administration, that's a government body, and it's the world's first.

It's the world's first commercial approval for brain computer interface. Second thing to say, I think is that China's doing quite a lot of this real biotech research at the frontier. We've mentioned in, I think, a couple of previous episodes

about a small company in Xinjiang that is trying to find ways to increase human longevity by significant amounts. I don't want to sort of throw out hyperbolic statements, but over a hundred years as a regular feature.

And this is also not regarded by the Chinese government as in any way eccentric. And we were talking earlier a little bit about Xi Jinping, I'm glad to be a Putin. There was this hot mic moment when Vladimir Putin

was last visiting Beijing in which he and Xi Jinping were having a conversation about how people might one day live to be 150 years old. And at the time, everyone thought, wow, this is really out there

as a conversation between two of the world's most powerful people.

But no, it's not out there.

in a fairly light-hearted conversation

from research that is currently underway in China.

“So I think to me, this is the big takeaway from this,”

is that China is pushing back the frontiers and it's putting money and administrative heft behind all of these very new technologies. - And I love that point you ended on, James. It's longevity science meets geopolitics.

You know, maybe we'll, you know, two distant future we'll have all these elderly leaders with brainship interfaces. All right, James, you know what time it is? It's prediction time.

As you peer into the future, what do you see? - I think I'm just going to stick with this brain computer interface and say that we will see a few more licenses for similar neurotect, because that's the general phrase

for what we're talking about, neurotect,

in other words, technology linked to the brain. I think we are going to see several new licenses over the next two or three years. And I imagine that neuro-access, the one that I mentioned is turning thoughts

into either speech or written words will get a license. Maybe this year, maybe next year, but it won't be that long. - So my prediction is twofold. It's mainly about macro and finance.

On the macro front, some of the April data you may have seen at James on industrial output, manufacturing investment even as a subset of fixed asset investment looked pretty weak. I suspect that going into Q2 will see a weak momentum

in the economy, we might see quarterly GDP growth,

closer to 4.5% in the second quarter of this year,

as trying to get hit, not just by the rising costs to inputs from energy prices, but also in terms of external demand starting to call as well for Chinese manufactured goods. And then the second part of it is,

I don't think this is getting enough attention. There's trillions of fixed term deposits that were used during the COVID pandemic by Chinese wholesale soldes. That basically will start to unwind this year.

These are five year term deposits. Now, every day Chinese people need to chase higher yields because some of these deposits now, only offer about 2% yields versus the 5% that they offered in back in 2022.

“So I think we'll see a lot of domestic flows”

into potentially the stock market to whilst management products as Chinese households try to find more yield in an environment that is really uncertain. All right, that's all for this episode.

Thank you for listening to China decode. This is a production of Prof. Jean Media. Make sure to follow us wherever you get your podcasts. So you don't miss an episode, talk to you again next week. (upbeat music)

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