China is now mainlined directly into U.S. debt. Reuters uncovered an astounding thing. The U.S. Treasury has literally set up a direct line for China to buy U.S. treasuries, bypassing brokers and any third party. China is the only country with this privledge. Those thinking this administration would confront China on currency manipulation, think again. Instead our government gave China real time direct access to dynamically control the value of the Yuan.
China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government, according to documents viewed by Reuters.
China, which holds $1.17 trillion in U.S. 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 U.S. 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.
China directly holds $1.17 trillion in U.S. Treasuries and is the largest foreign holder. There are reports China actually holds much more of U.S. bonds, but hides this fact by going through the U.K. for their additional purchases.
Buying U.S. Treasuries directly doesn't save commission fees for China. More it hides their trading strategies. Reuters notes these advantages by China bypassing the normal channels to bid on U.S. T-bills:
The privilege may help China obtain U.S. debt for a better price by keeping Wall Street's knowledge of its orders to a minimum.
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.
What no one is talking about here is currency manipulation. China must buy U.S. treasuries in order to keep their currency artificially low.
In China's Tails I Win, Heads You Lose Economic Strategy, we over view a report on China which goes into the mechanics of how U.S. Treasuries are used to manipulate the RMB. China is not simply buying up U.S. debt to own U.S. debt. Far from it, China buys U.S. debt in order to keep their currency artificially law.
Chinese merchants who export to foreign parties are still left with little choice other than to relinquish their foreign currency earnings to the state-owned banks in exchange for renminbi. Thus, when China runs a trade surplus, the supply of RMB in circulation grows. To counteract the inflation that would naturally spring from a rapidly expanding money supply, the Chinese government issues special bonds in an attempt to attract investors and thereby soak up the extra money. Thus, the government is left holding both foreign currency and RMB, and the Chinese public is left holding sterilization bonds denominated in RMB.
The Chinese government must then reinvest the foreign currency if it is to avoid losing value to inflation. The Chinese government could pursue any investment strategy, but in order to satisfy the second of its two primary monetary policies, namely, a managed exchange rate, it chooses to invest its foreign currency in bonds, primarily U.S. Treasury bonds.
This activity helps maintain the price of dollars relative to the RMB. To avoid a black market in foreign currency, the government requires that most Chinese businesses and citizens exchange their dollars at a bank, the large majority of which are state owned. Each day the central bank declares the price at which the state-owned banks will exchange dollars for RMB. Finally, in order to keep this maneuver affordable, the government must maintain an abnormally low domestic rate of interest. For if the prevailing interest rate at Chinese banks were to increase, then the government would be forced to increase the interest rate on sterilization bonds in order to maintain their attractiveness in the market, which would significantly increase the cost associated with the exchange rate policy.
The Atlantic also wrote a good article on the mechanics of China's currency manipulation and created the below graphic to help explain.
This is so bad, in spite of overwhelming evidence China is manipulating their currency by the mechanics outlined in this article, this administration denies China is a currency manipulator.
What the U.S. Treasury had done by giving China and China only direct access to bidding on U.S. treasuries is carte blanche to continue their currency manipulation, unabated. They cut out the middle man. China mainlined U.S. debt to keep their export driven mercantilism alive and our U.S. Treasury just enabled China to do it.