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China Gets An Unprecedented Direct Line to the U.S. Treasury

Thanks to documents uncovered by Reuters, it’s been revealed that China has been buying U.S. bonds directly from the Treasury for months now.

So what? We all know that China holds nearly $2 trillion in Treasuries, financing around 13% of our national debt.

But China is actually the only central bank in the world that’s allowed to buy Treasuries directly. Every other bank needs to operate through Wall Street banks known as primary dealers.

The trouble is this: Primary dealers don’t charge commissions, so this move isn’t saving China any money. And that means it’s all about secrecy.

By not revealing its bidding procedures to the primary dealers, China can mask its true demand for U.S. bonds. In fact, since the move, China’s bond purchases haven’t even shown up in the official numbers. You can see below that the net purchases have dropped significantly. That’s because China’s selling still shows up, but buying doesn’t.

Even more curious is that this was done without any public notice or acknowledgment. We will eventually pay back that debt – or our children will – and we deserve a reasonable level of transparency concerning whom we owe it to.

Why all the secrecy?

The innocuous explanation is that China believes its money managers can eke out a slightly higher return by managing its trading more efficiently than passing it through Wall Street’s primary dealers. That’s reasonable.

But as China amasses more and more U.S. assets, the ability for Beijing to use its position as our largest creditor to influence policy decisions strengthens.

If we’re going to allow China to amass such holdings behind closed doors, there’s only one defense we have left. There’s a saying that goes: When you owe the bank a million dollars, the bank owns you. When you owe the bank $2 trillion, you own the bank.

The only thing that keeps our own debt from being used as a weapon is that any such actions would tank the value of China’s holdings.

That’s what the numbers say at least… but with these backdoor dealings, who knows how much longer we’ll even have numbers to look at.

Ahead of the tape,

Matthew Weinschenk

Matthew Weinschenk