China can now bypass Wall Street when buying US government debt and go straight to the US Department of the Treasury, in what is the Treasury’s first-ever direct relationship with a foreign government, according to documents viewed by Reuters.
The relationship means the People’s Bank of China buys US debt using a different method than any other central bank in the world.
The other central banks, including the Bank of Japan (BOJ), which has a large appetite for Treasuries, place orders for US debt with major Wall Street banks designated by the government as primary dealers. Those dealers then bid on their behalf at Treasury auctions.
China, which holds US$1.17 trillion in US Treasuries, still buys some Treasuries through primary dealers, but since June last year, that route has not been necessary.
The documents viewed by reporters show the US Treasury Department has given the Chinese central bank a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June last year.
China can now participate in auctions without placing bids through primary dealers. If it wants to sell, however, it still has to go through the market.
The change was not announced publicly or in any message to primary dealers.
“Direct bidding is open to a wide range of investors, but as a matter of general policy we do not comment on individual bidders,” Treasury Department spokesman Matt Anderson said.
While there is been no prohibition on foreign government entities bidding directly, the Treasury’s accommodation of China is unique.
The Treasury’s sales of US debt to China have become part of a politically charged public debate about China’s role as the largest exporter to the US and also the country’s largest creditor.
The privilege may help China obtain US debt for a better price by keeping Wall Street’s knowledge of its orders to a minimum.
Primary dealers are not allowed to charge customers money to bid on their behalf at Treasury auctions, so China isn’t saving money by cutting out commission fees.
Instead, 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.
It is one of several courtesies provided to a buyer in a class by itself in terms of purchasing power. Although the Japanese, for example, own about US$1.1 trillion of Treasuries, their purchasing has been less centralized. Buying by Japan is scattered among institutions, including pension funds, large Japanese banks and the BOJ, without a single entity dominating.
Granting China a direct bidding link is not the first time the Treasury has gone to great lengths to keep its largest client happy.
In 2009, when Treasury officials found China was using special deals with primary dealers to conceal its US debt purchases, the Treasury changed a rule to outlaw those deals, Reuters reported in June last year. However, at the same time it relaxed a reporting requirement to make the Chinese more comfortable with the amended rule.
Another feature of the US-China business relationship is discretion: The Treasury tried to keep its motivation for the 2009 rule change under wraps, Reuters reported.
Documents dealing with China’s new status as a direct bidder again demonstrate the Treasury’s desire for secrecy — in terms of Wall Street and its new direct bidding customer.
To safeguard against hackers, Treasury officials upgraded the system that allows China to access the bidding process.
Then they discussed ways to deflect questions from Wall Street traders that would arise once the auction results began revealing the undeniable presence of a foreign direct bidder.
“Most [members of the public] 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,” one US government official wrote in an e-mail viewed by reporters.
In the e-mail, the official suggested providing basic, general answers to questions about who can bid in Treasury auctions.
“For questions more extensive or probing in nature, I think it prudent to direct them to the [US Bureau of the Public Debt’s government securities regulation staff] or Treasury public relations area,” the official wrote.
China’s request to bid directly, according to a former US debt management official who did not want to be identified, came from a confidence that their money managers could buy US debt more efficiently on their own than through Wall Street banks, which can often drive up the price of Treasuries at an auction if they know how much large clients are willing to pay. Such a practice is not specifically illegal, though most traders would deem it unethical.
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