NEW YORK (Reuters) – China can now bypass Wall Street when buying US government debt and go straight to the US 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, 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 $1.17 trillion in US Treasuries, still buys some Treasuries through primary dealers, but since June 2011, that route hasn’t been necessary.
The documents viewed by Reuters show the US Treasury Department has given the People’s Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011.
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,” said Matt Anderson, a Treasury Department spokesman.
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 United States 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 $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 Bank of Japan, without a single entity dominating.
Granting China a direct bidding link is not the first time Treasury has gone to great lengths to keep its largest client happy.
