Highlights
- Capital markets provide crucial funding for rare earth element exploration, extraction, and infrastructure development, helping mitigate market volatility and geopolitical risks.
- China’s potential expansion into global bond markets could strategically influence rare earth industry funding and challenge US financial dominance.
- The rare earth supply chain depends on sophisticated financial mechanisms that enable long-term investment, research, and geopolitical risk management.
Capital and bond markets play a crucial role in the rare earth element (REE) market by providing the necessary funding and financial stability for developing the supply chain from mining to refining and manufacturing. China’s potential moves into the global government bond market could also shift the balance of power in ways that affect the rare earth industry and broader geopolitical dynamics. Before delving into why these financial mechanisms are significant a brief reminder of the Rare Earth Exchanges piece titled “China’s Strategy of Complete Domination: Without a Shot Fired” In the piece, we shared China’s three-phase strategy for supremacy: dominate rare earth elements, control green industries, and establish a global digital currency by 2049—all without a shot fired, or that’s the hope. Recent news perked interest on the financial side of this equation, given China’s flirtation now with floating government debt.
The Role of Capital Markets in the Rare Earth Element Market
Mining rare earth elements requires a significant upfront investment. Capital markets allow companies to raise funds through equity (stocks) or debt (bonds) to finance the high costs of exploration, extraction, and infrastructure development.
And this capital must make its way down into the trenches of innovation. Investors in capital markets can provide funding for research and development (R&D) in areas like advanced refining techniques, recycling technologies, and substitutes for rare earths, helping to reduce reliance on China.
Global finance makes products and services available for risk mitigation in what is a highly volatile business. The rare earth market is highly volatile due to geopolitical factors and price swings. Capital markets help distribute risk among a broad base of investors, making it easier for companies to undertake long-term projects.
Plus, governments and private investors can use capital markets to strategically invest in rare earth projects in the U.S. or allied nations, ensuring a diversified and secure supply chain.
What about the role of debt or the bond markets?
Rare earth supply chains need robust infrastructure, including processing facilities and logistics networks. Governments and corporations can issue bonds to finance these capital-intensive projects. In fact, for the U.S. to catch up and surpass China’s rare earth processing dominance, a confluence of forces, including disruptive innovation and ecologically safe mining separating and production capability, must be in place.
Bond markets provide stable, long-term funding at relatively low costs compared to equity markets for key mission-critical infrastructure projects, for example. This is critical for rare earth projects that have long lead times and uncertain initial returns.
Governments can use sovereign bond proceeds to establish rare earth stockpiles or fund critical mineral supply chain initiatives, as seen with the U.S. Defense Production Act (opens in a new tab).
What’s China’s role in the global bond market and Its Potential Impact
China’s deepening involvement in the global government bond market could alter the balance of power in several ways, with direct and indirect effects on the rare earth market.
While the U.S. has become a debtor nation, China has a large, healthy surplus. With this increasing financial leverage comes power if they know how to use it. Note that China has plenty of crises, including oversupply/glut of housing and investment properties, to name but one notable example.
But by becoming a larger player in the U.S. or other government bond markets, China could wield influence over global interest rates. This financial leverage could impact the cost of funding rare earth projects in countries competing with China.
If China redirects its capital from rare earth development to purchasing foreign bonds, it may reduce investment in its own rare earth industry. Conversely, a focused push into sovereign bonds could signal its intent to diversify revenue streams beyond rare earths, reshaping global economic dependencies.
China’s bond purchases in allied or developing nations could be tied to rare earth access agreements, like its “debt diplomacy” through the Belt and Road Initiative. This could deepen its grip on rare earth resources outside its borders.
China’s entry into the U.S. bond market may challenge the dollar’s dominance. If Beijing uses bonds as a tool to pressure the U.S., it could create ripple effects in the funding environment for U.S.-based rare earth projects.
To summarize, capital and bond markets are critical to sustaining and expanding the rare earth industry, particularly for countries seeking to reduce reliance on China. If China expands its influence in global bond markets, it could leverage financial power to counteract efforts to diversify the rare earth supply chain and then, of course, execute the other two steps toward global dominance. To outmaneuver such moves, the U.S. and its allies must deploy creative financial strategies, leverage capital markets, and reinforce global partnerships to ensure a stable, independent, rare earth supply chain.
Chinese Moves into U.S Bond Action
Evidence for China’s moves into Bond—Is the U.S. Dollar No Longer a Purely American product? Chinese banks, including the Agricultural Bank of China (opens in a new tab), Bank of China (opens in a new tab), and Industrial and Commercial Bank of China (opens in a new tab), announced last month that they had assisted China’s Ministry of Finance in issuing $2 billion in sovereign hashtag#bonds (opens in a new tab) in Riyadh, hashtag#SaudiArabia (opens in a new tab) as reported by Djoomart Otorbaev (opens in a new tab), former Prime Minister of the Kyrgyz Republic ( Kyrgyzstan (opens in a new tab)) on LinkedIn.
According to Otorbaev’s entry, “the bonds received a strong response from the market, with international investors actively subscribing to them. The total subscription amount reached $39.73 billion, which is 19.9 times the issuance amount,” according to an announcement on the Ministry of Finance’s website [https://lnkd.in/ekj9GDyc (opens in a new tab)]. Financial Times (opens in a new tab) (FT) originally covered the unfolding news.
According to FT, the bid-to-cover ratio significantly exceeds what is considered a standard 2 to 3 times ratios seen in US Treasury auctions (opens in a new tab).
It turns out that the settled interest rates were only 1 to 3 basis points (0.01 percent to 0.03 percent) above that of the US Treasury. Remember, the latter is known to be the risk-free security, the place to park capital that is considered the safest and most reliable in terms of the underlying government issuer. In Otorbaev’s recent piece, he notes by comparison, even AAA-rated countries like Germany typically offer 10 to 20 basis points higher than US Treasury rates.
Do such low interest rates in Chinese government debt indicate the market’s increasing confidence in China’s creditworthiness? What’s the implication that China was able to achieve a mere 1 to 3 basis point spread above US Treasurys? Does the market follow and adhere to Western rating agency assessments?
As an example, Moody’s (opens in a new tab) A1 rating for China ranks markedly lower than its top-tier AAA rating for the US.
The former Prime Minister of Kyrgyzstan:
“What if Beijing entered the markets with significantly higher bids? This would mean China competed directly with the US Treasury in the global dollar debt market. As a result, instead of countries purchasing US Treasuries, they might opt to buy Chinese dollar bonds, which offer similar interest rates.”
Could this unfolding development lead to a parallel dollar system in which China controls some of the dollar flow? What if Beijing becomes a competing issuer of dollar bonds? Would they be able to challenge the US government by undermining its monopoly on financing its debt?
Again, with Trump 2.0 starting next month, China will undoubtedly think about the implications of the ongoing execution of its rare earth to digital currency domination. Of course, the previous Trump administration, or Trump 1.0, did little to nothing to stop the current monopoly on processing.
As the former Prime Minister writes on LinkedIn, would China employ the use of its dollars to finance its Belt and Road Initiative? They could take proactive measures such as helping developing countries repay their dollar debts back to creditors in the West.
In fact, the Asian behemoth could ask for its generosity to be applied to those low- and moderate-income countries to be rapid in yuan. Eliminating its excess dollars, plus bolstering an international network of national partners less dependent on the dollar, Beijing commences its deepening of economic integration per the 2049 plan.
Is China inserting itself as an intermediary “at the heart of the dollar system”, strengthening Chinese rather than American economic influence?
Here at Rare Earth Exchanges, we remind everyone that we launched this media to chronicle the transformation of the current highly uneven rare earth element supply chain, one presently heavily controlled by the Chinese. This involves more than just rare earth elements and minerals, mining, separation and refining, and transport and production to operations, but a range of other services and supports, including banking and financing, making it all possible.
China’s state-owned banks are heavily involved with China’s rare earth complex monopoly, which has 80%+ control over processing and production. This model has its pros and cons and, of course, markedly differs from systems in the West.
Observers of these unfolding trends should keep a keen eye on China’s largely overlooked strategic maneuver, given the potential for serious long-term implications. Over here in the USA, our way of life is contingent on not only protecting but continuously innovating on our powerful financial system, and to do that, we’ll need control over rare earth supply chains, next-generation products, and financial innovation.
Daniel
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