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

Alice Han and James Kynge break down why Russia is pushing hard for China to approve the Power of Siberia 2 pipeline, what China’s accelerating selloff of U. S. Treasuries could mean for the American economy, and how China became the first country to commercially approve a brain-computer implant — moving ahead of the U. S. and Elon Musk’s Neuralink. They also explore the deepening China-Russia alliance, mounting pressure on the U. S. dollar, and whether China is beginning to pull ahead in the global race for technological dominance. Subscribe to China Decode on Substack for weekly analysis, livestreams, and deep dives into the biggest story shaping the global economy: chinadecode.profgmedia.com Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 1:29Alice Han?

  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 US getting closer to both Russia and China individually.

• 1:54Alice Han?

  Welcome to China Decode. I'm Alice Han.

• 1:56James Kynge?

  And I'm James King.

• 1:58Alice Han?

  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

• 2:41Alice Han?

  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 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?

• 3:18James Kynge?

  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

• 4:03James Kynge?

  It's 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, 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, 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.

• 4:47James Kynge?

  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 axis of authoritarianism, in my view, and it's clearly oppositional to the United States. For Europe, obviously, this has been a major problem.

• 5:30James Kynge?

  I mean, Russia is such, 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. And now I get back to the power of Siberia two 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-

• 6:13James Kynge?

  Siberia two pipeline, if it is built, would be two thousand six hundred kilometers long, cost up to thirty four 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 fifty percent 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

• 6:56James Kynge?

  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?

• 7:25Alice Han?

  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 twenty twenty

• 8:06Alice Han?

  to twenty twenty four. That is, to your point, mainly driven by hydrocarbons, oil and gas. China increased its imports even this year of Russian oil by thirty five percent, and total trade is up nearly twenty percent. And more importantly, Russia is China's largest single source, I mean, country wise of crude oil. That's about twenty percent of its crude oil imports. So In a period in which we've seen China being on the chopping block in terms of derisking 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,

• 8:47Alice Han?

  of autos, of trucks, of drones going into Russia, or drone components, even though technically 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. So according to some reports, China is reportedly looking

• 9:29Alice Han?

  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

• 10:14Alice Han?

  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 US. Getting closer to both Russia and China individually.

• 10:32James Kynge?

  Yes, so right, Alice. 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, 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.

• 11:18James Kynge?

  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 it's quite interesting that neither side was able to agree a price and therefore the future of the power 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.

• 12:02Alice Han?

  Okay, we'll be back with more after a quick break. Stay with us.

• 12:14Scott Galloway?

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• 15:35Alice Han?

  Welcome back. The war in Iran triggered a global sell-off of US Treasuries starting in March, and China was no exception to those joining the off-ramp. The sell-off is motivated by the need to liquidate reserves of the US 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

• 16:18Alice Han?

  and had to move back on his liberation tariffs. 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 US is a global reserve currency, so this is an extremely important thing, not just for the US but also for the world. The 30-year is an important signal of inflation, growth expectations. It's also things that mortgages in the US are pegged at. You know, can't be understated how important the thirty year yield is and the curve of the US Treasury. Right now, it's crazy that we're north of five percent. We haven't seen these levels since two thousand and seven. For some people who are screaming recession, this is yet another indicator that we are fast approaching that,

• 17:03Alice Han?

  driven by the energy shock from the Middle East.

• 17:06James Kynge?

  Alice, are you saying effectively that the US 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, is that the dynamic here?

• 17:22Alice Han?

  Well, we can go into the minutia 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 nineteen nineties, surpassed US-denominated Treasury holdings. So we saw that close to four trillion dollars 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 US. We've got public debt to GDP in the US now north of a hundred and twenty percent and rising, and unclear about the US's role as the world number one, the world hegemon.

• 18:07Alice Han?

  And so there are recurring questions, you get this at a lot of panels, I'm sure that you and I get invited to, about whether or not China will overtake the US 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 US 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.

• 18:51Alice Han?

  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 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?

• 19:28James Kynge?

  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, et cetera. 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? 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

• 20:13James Kynge?

  US treasuries, we can sink, you know, 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. This is, these are very complicated flows. The other thing I'd like to point to is the possibility that the selling down of US

• 20:55James Kynge?

  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 sell down of US Treasuries by China has been. But I think it's a fascinating

• 21:38James Kynge?

  topic, Alice, and I really believe that if we look at the renminbi versus the US dollar over the next five years and their relative strength in the global economy, we're going to see many interesting trends.

• 21:51Alice Han?

  Yeah, and just to backtrack a little bit, firstly, I love Brad Setzer's work. He's one of the best when it comes to balance sheets, trade balances, capital account balances. And he, you know, 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

• 22:33Alice Han?

  say really before Covid in particular, you saw China really build up an FX war chest, so to speak. You know, they had large holdings, even larger than today, you know, probably closer to four 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

• 23:16Alice Han?

  year or so. And part of that, I think, is largely driven by dollar weakening against pretty much all the currencies. And FX reserves are now 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?

• 23:48James Kynge?

  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 renminbi 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 is very cognizant of the fact that Europeans, countries and the US are constantly blaming China for its enormous trade surplus. And it realizes that it needs to allow its currency 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.

• 24:33James Kynge?

  So I think that's a crucial trend here.

• 24:36Alice Han?

  Okay, let's take one last quick break. Stay with us.

• 24:46Speaker 00

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• 24:55Speaker 01

  My boss asked for results, so I opened my dashboard for the only positive sounding metric I had: impressions.

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• 25:46Scott Galloway?

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• 26:53Alice Han?

  Welcome back to yet another technological breakthrough that's causing a stir in China and around the world. The country just became the first to approve a brain chip for commercial use, an implant embedded into the brain to help people with spinal cord injuries. The brain-computer interface is made by the Shanghai-based company Neural Medical Technology, which, for context... Has 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?

• 27:32James Kynge?

  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.e. 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 Keanu Reeves character had an overloaded brain implant that was used to smuggle highly confidential information to mega corporations.

• 28:14James Kynge?

  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, you know, 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 injuries. So basically, it picks up brain impulses and then it translates them

• 28:58James Kynge?

  into a way that can be understood 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.

• 29:26James Kynge?

  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 business of brain-computer interface.

• 30:09James Kynge?

  And it just shows, I think, how forward-looking China's government is on its scientific agenda. The Chinese government has unveiled a seventeen-step roadmap to establish a global lead in the brain-computer interface industry by 2030. And added to that, it's allocated 1.7 billion US dollars 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 Neuroexcess is something that has successfully turned thoughts into real-time speech in Mandarin Chinese.

• 30:53James Kynge?

  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?

• 31:18Alice Han?

  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 Elon Musk's Neuralink 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. And they rejected Neuralink's application in 2022. But Chinese approval agencies have just been faster to commercialize this

• 32:00Alice Han?

  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?

• 32:18James Kynge?

  Well, that's a great question. I mean, I think, you know, 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

• 33:01James Kynge?

  about a small company in Shenzhen 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 100 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 and Vladimir 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, you know,

• 33:45James Kynge?

  this is really out there as a conversation between two of the world's most powerful people. But no, it's not out there. This is, you know, the logical conclusion that one might draw, certainly in a sort of fairly lighthearted 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.

• 34:19Alice Han?

  That I love that point you ended on, James. It's longevity science meets geopolitics. You know, maybe we'll go the not too distant future will have all these elderly leaders with brain chip interfaces. All right, James, you know what time it is. It's prediction time. As you peer into the future, what do you see?

• 34:36James Kynge?

  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 neurotech. That's the general phrase for what we're talking about, neurotech. 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 Neuroexcess, the one that I mentioned, is 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.

• 35:16Alice Han?

  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 it, James, on industrial output, manufacturing investment even as a subset of fixed asset investment, looked pretty weak. I suspect that going into Q2, we'll 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 China gets hit, not just by the rising costs to inputs from energy prices, but also in terms of external demand starting to cool as well for Chinese manufactured goods. And then the second part of it is, I don't think this is getting enough attention.

• 35:56Alice Han?

  There's trillions of fixed term deposits that were used during the COVID pandemic by Chinese households 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 back in 2022. So I think we'll see a lot of domestic flows into potentially the stock market, into wealth 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 G Media.

• 36:41Alice Han?

  Make sure to follow us wherever you get your podcasts so you don't miss an episode. Talk to you again next week.

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