Money, Politics And The Wealth Of Nations

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Owning a Country

We believe that the United States has made a critical error in the high-stakes game of global dominance. They assumed that military bases and shared values were enough to secure our alliances and they have been proven wrong. While Washington focused on traditional diplomacy, the Chinese identified a hidden vulnerability in America’s conventional approach to its allies.

They found a way to exert influence over South Korea that uses our own financial systems against us. This financial maneuver is explained in our previous article so here we will just outline how it works.

Beijing has successfully executed a roughly decade-long operation to fill what we called a strategic void in the South Korean bond market. Recent analysis suggests China is now the undisputed master of South Korean sovereign debt and they hold a large amount of it. This dominance resulted from Chinese agility in seizing financial opportunities that were open to all. America probably rues this neglect now. (RELATED: The One Hundred Billion Dollar Hostage)

Missed Opportunity

In fact, America rarely engages in long-term strategic bond holdings in Asia. As the issuer of the world’s reserve currency, the U.S. has no practical need to accumulate foreign government bonds. American institutions rely on the safety of U.S. Treasuries when they invest, and this strategy creates what is often called a safe haven for them.

So when the bonds were available China purchased them without meaningful American competition and filled the gap, the strategic void. For roughly ten consecutive years Chinese state-linked investors have increased their holdings of Korean debt to become the number one foreign owner in the world. These investment purchases have allowed Beijing to embed itself deeply within the sovereign finance system of South Korea to create an instrument of influence that surpasses traditional diplomacy.

A Shadow Influence

This has happened because the debt exerts what might be termed a shadow influence on markets. Unlike equity markets which require transparency, the movement of state-controlled bond holdings allows investors to exert pressure from the shadows without being accountable or traceable. The debt can create uncertainty and become a weapon that invisibly exerts influence on national decisions.

This weapon may already be shaping Korean politics. Korea relies on China for trade and now it relies on China for fiscal stability as well. So if Washington asks Seoul to take a tough stand against the CCP, Korean policymakers will almost certainly think twice. They fear that a single large sell order from the People’s Bank of China could freeze their economy. That fear is enough to act as a brake on Korean foreign policy. This in turn threatens the health of the country’s formal alliance with the U.S., not forgetting the effect of any economic slowdown on the population.

De-Dollarization

China’s strategy is aggressive but also defensive. After watching Western sanctions freeze Russia’s reserves in 2022, Beijing accelerated what we call its de-dollarization efforts. They are dumping U.S. Treasuries and moving the capital raised to purchase the debt of U.S. allies like South Korea and Japan.

This serves to embed Chinese capital deeply into the economies of America’s partners. It also insulates China from future U.S. sanctions. Let’s imagine that a conflict erupts over Taiwan. With its foreign holdings, China will have effectively insulated itself against any new imposition of U.S. sanctions on it. Simultaneously, it can influence U.S. allies with its clever financial maneuver. Korean debt becomes a shield against American power to raise sanctions and operate unfavorable manipulations of the conversion rates. (RELATED: The Chinese Trap Sprung On America In South Korea)

Squeezed on Both Sides

This situation reveals a massive failure of U.S. foreign policy. The U.S. has squeezed South Korea with regulations like the “50% Rule” to cut off technology flows to China, a rule America recently suspended until November 2026. This rule applied U.S. export sanctions to any global venture with more than 50% ownership by a blacklisted Chinese entity. This shows how the U.S. demands loyalty and control through regulation. But China is demanding obedience from South Korea through capital. Korea is being squeezed from both sides.

A U.S. financial presence could counterbalance Beijing, but without this being available we risk pushing South Korea past its breaking point. We have come to realize that a financially subservient South Korea is an ally in name only.

As we noted in the previous article in this series, South Korea’s economy might suddenly collapse under Chinese pressure, which could happen with a massive sale of Chinese-held debt in the bond market. If this eventually happens, then the financial burden of stabilizing the peninsula will fall to America and trickle down to the American taxpayer.

Dollar Wise, Yuan Foolish

It is clear that America cannot sustain the U.S.-South Korea Alliance at the same time as South Korea is under the influence of the Chinese government. We believe that it is time for the U.S. to implement a new financial sovereignty framework. The prior application of the 50% Rule made the core objective of U.S. tariff policy very clear — to choke off China’s funding streams. The sooner these coffers are drained, the sooner the U.S. can sever the lifeline fueling the CCP’s malign activities — from the Belt and Road Initiative, to its plans to invade Taiwan, to creating election interference, human rights abuses and much more.

Washington should articulate the moral and strategic necessity for nations to join this campaign, and use its diplomatic channels to stoke up wide participation. This has to be accompanied by stiff financial sanctions in order to block global capital outflows to China. That means including effective measures such as demanding the repayment of Chinese sovereign debt. Furthermore, we need transparency protocols that clearly distinguish between genuine private investment and state-directed capital if we are to avoid what has happened to South Korea.

The authorities in U.S. foreign policy have known for a long time that global financial markets are actually theaters of war. The simple maneuver we have written about here has massive consequences for the Indo-Pacific region. China is buying the loyalty of the Indo-Pacific and gaining financial advantage one bond at a time. A countermove could provide our allies in the region with dollar alternatives to the Chinese yuan and strive to dominate the world reserve currency competition with the mighty dollar once and for all.