The Chinese alternative

An interesting development is occurring in parallel to the Iranian conflict. Perhaps because of it. The trading volume in Chinese, remimbi denominated bonds has picked up significantly. These bonds trade in the Hong Kong North bound bond Connect and, although there is no breakdown by investor type, all of them are international investors: asset managers, pension plans, or central banks might be diversifying away from U.S. treasuries. China is the second largest debt issuer after the U.S., and yes, it runs a big budget deficit. Officially, is 4% of GDP, but central planning is expensive, and when accounting for local government debt, and other items, the broad deficit is close to 7% of GDP. Which is a lot. Perhaps the difference with the U.S. is that Chinese debt is used mostly for infraestructure, and it’s mostly GDP accretive, which is not the case of the U.S., but in any event, investors are finding depth and liquidity outside Uncle Sam coffers. And that’s not good for the U.S., and the dollar. We need to see how the negotiations with Iran end, to understand if the petroyuan becomes a reality or not. This has enormous implications for the U.S. economy.

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