China no longer needs to go through Wall Street when it wants to purchase copious amounts of U.S. debt — they can go right to the source: the U.S. Treasury.
This is the Treasury’s “first-ever direct relationship with a foreign government,” according to a recent report from Reuters.
But what does this mean? It means that unlike every other central bank in the world, the People’s Bank of China won’t have to place orders for U.S. debt through the Wall Street banks appointed by the feds as “primary dealers” to bid on Treasury auctions.
“China, which holds $1.17 trillion in U.S. Treasuries, still buys some Treasuries through primary dealers, but since June 2011, that route hasn’t been necessary,” Emily Flitter writes for Reuters.
So how does China bid on U.S. debt? Simple: through a “direct computer link” to the U.S. Treasury’s auction system. China has been bidding on U.S. debt without working through the aforementioned Wall Street banks as “primary dealers” — although every other bank is required to.
Surprisingly (unsurprisingly?), the deal between the Treasury and China wasn’t publicly announced.
“Direct bidding is open to a wide range of investors, but as a matter of general policy we do not comment on individual bidders,” Matt Anderson, a Treasury Department spokesman, told Reuters.
Why keep it on the down low? Reuters posits that by keeping Wall Street’s knowledge of the debt purchases to a minimum, and therefore containing what is already a politically contentious debate, it’ll keep the prices down for China’s bank.
“China is preserving the value of specific information about its bidding habits. By bidding directly, China prevents Wall Street banks from trying to exploit its huge presence in a given auction by driving up the price,” Flitter writes.
And this isn’t the first time the U.S. Treasury has twist itself into all sorts of contortions keeping America’s largest creditor happy.
“In 2009, when Treasury officials found China was using special deals with primary dealers to conceal its U.S. debt purchases, the Treasury changed a rule to outlaw those deals,” Reuters reports.
“But at the same time it relaxed a reporting requirement to make the Chinese more comfortable with the amended rule,” the report adds.
The Treasury’s silence on the deal isn’t inadvertent. Reuters uncovered a handful of communications calling for discretion and advising spokesmen to answer questions pertaining to a direct foreign bidder with vague answers.
“Most hold the view that foreign accounts only submit ‘indirect bids’ through primary dealers. This will likely cause significant chatter on the street and many questions will likely come our way,” wrote one government official in an email viewed by Reuters.
“For questions more extensive or probing in nature, I think it prudent to direct them to the or Treasury public relations area,” the email added.
Considering the fact that China is America’s greatest creditor, as well as the fact that they are becoming increasingly antagonistic in cyber security attacks, maybe – just maybe – granting the Communist country a direct computer link to the treasury auction system isn’t the wisest decision.
Front page photo source: China Aid