China Now Purchasing US Debt Directly from Treasury

May 23, 2012

When purchasing large amounts of U.S. debt, you generally must use a primary dealer to bid on that debt at Treasury auctions. Many of the primary dealers are large firms and banks on Wall Street.  But not all of them.  Since mid-2011, China has been purchasing U.S. debt directly from the Treasury Department. China’s working through a primary dealer could alter the list price in ways other buyers would not and set them at a disadvantage. This is certainly not the first instance of Treasury placating to its largest purchaser, but China is the only foreign country to receive this special treatment.

In 2009, Treasury officials found China using special deals with primary dealers to conceal its US debt purchases at the time. Treasury closed that loophole, but then at the same time relaxed the reporting requirements to make the Chinese more comfortable. Instead of publicly announcing the changes though, Treasury, made no formal announcements or press releases to the affect.  This story was broken yesterday by Reuters.

As the largest purchaser of US Treasury debt, China has a certain amount of sway when it comes to how it purchases that debt. But, providing a foreign government entity, the first in history, with a direct link to the Treasury Department via a secure network, is concerning.

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