The Chinese government has sold its first dollar bond issue in thirteen years. Given that fact alone, the idea is causing more than a little confusion, perhaps consternation. Why now? What are they really up to? It seems as if it is contradictory, especially given China’s very public positions against the dollar as hegemonic reserve (the coming market for oil in CNY, for one).

There is no inconsistency here, though; there is instead the dollar rock meeting the economic hard place. The Chinese still need dollars, billions of them, hundreds of billions, in fact. They can’t just tomorrow decide to pay for everything that goes into China in RMB as the economy would immediately collapse. Dollar defaults would send shockwaves throughout the global system in a way that would make 2008 look pitifully small, and it would hit China the hardest.

The dollar short applies to China more than any other country on Earth. To pay for everything that has already made its way to that country, Chinese banks have had to borrow those dollars primarily from eurodollar banks trading on eurodollar markets. The liquidity provided by those eurodollar markets are the problem; it has made procuring dollars the Chinese need more difficult, expensive, and occasionally prone to drastic interruption (August 2015 & January 2016 more recently).

What do you do if you find yourself in that situation? You still need dollars, but it isn’t so easy anymore.

You do a couple of things, one of which is to work feverishly toward reducing any marginal need to transact in dollars. CNY for oil is one way, including getting repaid prior dollar loans from all across Africa in direct crude shipments, as are the small bilateral trade agreements signed between China and a number of other countries. Those, however, only marginally reduce China’s bogey, they do not get close to eliminating it.

Another alternative is the bond market; in the very same way using the very same vehicle US and European companies turned to in early 2009. If you couldn’t get liquidity financed via bank-drawn dollars, you could at least build up a liquidity cushion, in dollars, via the floatation of longer-term paper.