This paper explains how China’s Belt and Road Initiative (BRI) is facing serious problems. It shows how these problems can change the way money flows around the world. The focus is on how U.S. long-term government bonds, especially the TLT ETF, are affected. We use real examples: CPEC in Pakistan, AIIB bond spreads, and Argentina’s currency swap. We also look at how currency risks and U.S. Federal Reserve actions play a role. The goal is to understand money movements, not just to predict interest rates.
1. Introduction: BRI Is Not Just About Roads
China’s BRI was not only about building roads and ports. It was also about sending Chinese money abroad. China has a lot of savings. BRI was a way to lend that money to other countries. But now, many of these countries are having trouble paying it back. That puts pressure on China’s banks. This paper shows how that stress could push China to buy more U.S. long-term bonds.
2. Real-World Problems
2.1 CPEC in Pakistan
China gave Pakistan billions of dollars to build roads and power plants. This is called the CPEC project. But now, 36% of that money is not being paid back on time. Pakistan does not have enough U.S. dollars to pay. This is a big loss for Chinese banks. To make up for it, China may move its money into safer assets like U.S. bonds.
2.2 AIIB Bond Risk
The AIIB is a China-led bank that gives money to other countries. But investors now think AIIB is risky. In 2020, AIIB bonds paid 0.28% more than U.S. bonds. In 2025, they pay 0.65% more. That shows trust in AIIB is falling. This pushes up costs for China’s other banks too.
2.3 Argentina’s Currency Swap
Argentina borrowed Chinese money in Chinese currency (yuan). But Argentina is running out of dollars. In April 2025, the U.S. government said it might help Argentina with dollars. That means Argentina may not need to repay China right away. This blocks China’s money from coming back. It may also cause China to move more money into U.S. bonds instead.
3. Scenarios and What Could Happen
We looked at different cases for what could happen next. Here are some:
| Case | What Happens | U.S. Bond Rates | TLT Return |
|---|---|---|---|
| A1 | China weak, Fed neutral | Rates fall | +10% |
| A2 | China weak, Fed tightens | Small fall | +2% |
| B1 | Global slowdown | Big fall | +18% |
| B2 | Currency stress (CNH) | Bigger fall | +22% |
| C1 | China wins back trust | Rates rise | –3% |
| C2 | Inflation and Fed hikes | Rates jump | –12% |
Average expected TLT return is +5.4%.
4. Currency Costs and Fed Actions
4.1 CNH Hedging Cost
When it costs more to hedge Chinese currency, China buys fewer U.S. bonds. If the cost rises 25 basis points, China may buy $6.5 billion less in bonds that quarter.
4.2 Fed Response
In the past, the U.S. Fed acted when long-term bond rates moved too fast:
- 2014: Japan bought U.S. bonds → Fed bought short bonds to slow the move.
- 2019: Trade war fears → Fed started buying again.
- 2023: Bank crisis → Fed paused balance sheet cuts.
If rates drop too fast, the Fed may act again.
5. Risk Matrix: What Mix of Events Matters
| Shock | Fed Neutral | Fed Eases | Fed Tightens |
|---|---|---|---|
| CNH cost up | +2% | +6% | –3% |
| AIIB risk up | +4% | +9% | +1% |
| Oil price up | –4% | –1% | –8% |
| EM defaults | +7% | +11% | +2% |
This shows how different factors change TLT returns.
6. What Can Governments and Investors Do?
U.S. Government
- Slow down bond sales (QT) if rates fall too much
- Use swap deals to guide countries away from China
China
- Keep U.S. bonds as safe reserves
- Use better currency hedging tools
Investors
| Type | Strategy | Hedge | Signal to Act |
|---|---|---|---|
| Careful | Buy TLT, some gold | Buy CNH puts | If AIIB risk > 70 bp |
| Balanced | Mix TLT and short bonds | Use rate options | If volatility < 80 |
| Bold | Yield curve steepener | Buy oil calls | If Fed tightens fast |
7. Conclusion
China’s big lending plan is in trouble. Many countries can’t pay. China may move its money into safer U.S. bonds. That could help TLT go up. But many things—like currency costs and Fed moves—can change the result. The key is to watch where the money is going, not just where rates are.
Date: April 24, 2025
Sources: PBoC, AIIB, IMF, TIC, Bloomberg, Refinitiv
Prepared by: Hoho Macro Research
HOHO-ECONOMICUS Insight 
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