For the first time, China is being allowed to bypass Wall Street when buying U.S. government debt. They are being allowed to go straight to the U.S. Treasury.
The Treasury has never had a direct relationship with a foreign government. No other central bank in the world has been allowed to do this. The other central banks all place orders through Wall St.
China holds $1.17 trillion in U.S. Treasuries and a fraction are bought through dealers but all that changed in June 2011. The Treasury gave the Chinese communists a direct computer link to the auction system.
This had been kept secret. This change allows them to obtain U.S. debt at a better price.
China is our largest exporter (without allowing equivalent trade on their end) and largest creditor. They own us.
China, which poses a National Security Threat because of how much we owe them, is now being given increased access to our Treasuries at a cheaper rate through an unacceptable process, perhaps revealing how indebted we are to these Communists. Additionally, they pose a cyber security threat and we just gave them the keys to the safe.
Reuters: …”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.
In the email, the official suggested providing basic, general answers to questions about who can bid in Treasury actions.The granting to China of direct bidder status may be controversial because some government officials are concerned that China has gained too much leverage over the United States through its large Treasury holdings.
For example, economist Brad Setser, who is a member of the National Economic Council and has also served on the National Security Council, has argued China’s large Treasury holdings pose a national security threat.
Writing for the Council on Foreign Relations in 2009, Setser posited that China’s massive U.S. debt holdings gave it power over U.S. policy via the threat of a swift, large sale of U.S. debt that could send the market into turmoil and drive up interest rates.
But Treasury officials have long maintained that U.S. debt sales to China are kept separate from politics in a business relationship that benefits both countries. The Chinese use Treasuries to house the dollars they receive from selling goods to the United States, while the U.S. government is happy to see such strong demand for its debt because it keeps interest rates low.
A spokesman for the Chinese embassy in Washington did not respond to calls and emails seeking comment.
The United States has, however, displayed increasing anxiety about China as a cybersecurity threat. The change Treasury officials made to their direct bidding system before allowing access to China was to limit access to the system to a specially designed private network connection controlled by the Treasury.
China is among the most sensitive topics for bankers and government officials who court the country as a financial client because of its size and importance, and none would agree to comment on the record for this story.
A former debt management official at the Treasury who did not want to be identified said that as China’s experience in the U.S. Treasury market has deepened over time, Chinese officials may have felt more comfortable taking the reins in the management of their holdings.
Their request to bid directly, in his view, came from a confidence that their money managers could buy U.S. 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 that is not specifically illegal, though most traders would deem it unethical.
Evidence of China’s growing sophistication as a money manager in the U.S. markets is clear in its expansion of operations in New York…