They say the customer is always right, and when you're as dependent upon your "customers" as the US government is, I suppose it pays to offer top notch customer service. The US Treasury has entered into a first-ever direct-selling relationship with China, effectively allowing the Chinese to bypass Wall Street firms and purchase treasuries straight from the source.
It isn't costing primary dealers anything, but it is an interesting twist. And it helps to conceal what the Chinese are really doing with treasuries. Before you think I'm going all Zero Hedge on your asses, I simply mean that under the old primary dealer model the whole market knew how much and how many the Chinese were bidding for at a given auction. Now the Chinese could potentially get better executions because the market won't know exactly what they're up to.
It's also important to note that this only applies to treasury purchases and not sales. If and when the Chinese want to sell a treasury holding, they still have to go through a primary dealer.
The US Treasury has gone to considerable lengths to keep this new arrangement under wraps; they made no public announcement and didn't even inform the primary dealers. This is no doubt due to the controversial nature of the policy.
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.
So what do you think? Is this just good customer service, or is this the US government kowtowing to its largest creditor?
I merely think this reveals how important the Chinese are to the US. I wonder how this will affect the revenue stream of the Wall Street firms.
It has zero impact on a fee basis. But not knowing what they're bidding certainly adds an element of mystery to auction pricing.
It's definitely more efficient to cut out the middle man. It's also a revealing insight into exactly how important this administration thinks Wall Street is, and this development should be closely monitered. This definitely puts more power into Chinese hands, but also allows for a greater coordination of policy between the U.S. and China: for better or for worse.
Anyone know how this will affect the currency exchange rate between us, if at all?
I'm not sure what to think about this. On one hand it makes sense to allow China to do this because they are such a large buyer, however it is somewhat disconcerting to think that China has a direct link to the Treasury in that way. In some respects it would be nice to know how the Chinese are bidding but I guess it doesn't particularly matter as long as they keep taking down large batches of treasuries. I'm more concerned about the fact they went to great lengths to keep it from becoming public. I understand why but this is certainly something that should be out there.
Also, I was thinking about this. To some extent it may not be an awful idea that the Chinese can exert an inordinate amount of pressure on the US about fiscal policy. Considering we are unable to swallow the tough pills ourselves or accept solutions to our fiscal woes, maybe having an large unemotional voice with a large (huge) vested interest in our long term fiscal stability isn't a bad thing. Maybe it would force us to examine our own issues and at the very least take action just so we don't have to be coerced by China. I'm not saying I approve of China having any say whatsoever in what we do but it seems to me maybe that is what is needed to get the clown show in Washington to act.
That's the line I'm taking right now. Overall, I'm not sure how worried I am about the Chinese holding so much of our debt, it might not be great long term for America, but we'll be getting what we deserve if it's really as bad as some people think.
I might have to follow Jim Rogers over to Asia if we don't pull our heads out of the sand. I think we're getting into "beggars can't be choosers" territory with our fiscal recklessness.
they've already got out of the long end of the curve and are cutting back on the short end. this is a form of "power" that they don't really want.
Thanks for posting this Eddie... Very interesting.
I wonder if keeping Wall Street (and the public) in the dark about amount of Chinese buying is something policy-makers sought by this move and not just a by-product of the decision. Would opacity help the issuer in this case?
One thing is certain, sales guys now have a standard excuse to go to when stumped by a client's questions "it's probably the Chinese"....
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