May 23rd, 2012
Econintersect: Individuals, money managers and institutional investors can sign up to buy Treasury securities as they are issued by the U.S. government in a program called Treasury Direct. There are a number of financial institutions, known as primary dealers (PDs), are required to bid for all Treasury issuance not sold through the direct channels. These (currently 21 in number after the collapse of MF Global) large financial entities (mostly large banks) form the secondary distribution channels for all debt not sold to direct buyers, including trade with the Federal Reserve whenever the Fed conducts open market operations. All the central banks in the world buy U.S. debt through the PD channel. It has just been learned that actually is all except China.
Pictured are U.S. Treasury Secretary Timothy Geithner, U.S. Secretary of State Hillary Clinton and China's Vice Premier Xi Jinping at a recent meeting. Click on picture for larger image.
Last week Reuters reported that China has been allowed to buy Treasuries directly without using a PD intermediary. The first instance of such a transaction reported by Reuters was June of 2011. In essence, the People’s Republic of China (via the People’s Bank of China, the country’s central bank) has had the same Treasury direct opportunity as individuals and financial institutions. No other country has been granted this privilege before, not even Japan which has also been a massive buyer of U.S. debt. However, Japan has been able to use a Japanese PD so the transaction costs that central bank incurs are spent within its own country. China has no PDs.
The reason for the special privilege granted to China that transaction costs for buying through a PD have frequently put the near zero coupon short-term Treasuries into negative yield to maturity. China may have been reluctant to lose money on their Treasury security transactions.
Just under two weeks ago an article in the Financial Times reported that ICBC (Industrial & Commercial Bank of China) had been given permission to purchase the U.S. subsidiary of Hong Kong’s Bank of East Asia. And this may not be the end of such transactions. From the Financial Times:
The Fed said that Wednesday’s decision was “specific to ICBC” but industry lawyers said it was a clear sign that the Fed was likely to approve acquisitions by other Chinese banks and future acquisitions by ICBC. Mr. Patrikis [Ernie Patrikis, a partner at White & Case who acted for ICBC] predicted more acquisitions but said Chinese banks would “proceed at a logical, thoughtful pace”.
Looking ahead it is possible that China, once established with ownership of U.S. regulated banks, may be admitted to the PD inner circle, which would obviate the need for special the privilege now granted.
The graphic below displays the foreign holders of U.S. debt as of the end on 2008. As of March 2012 the Treasury Dept states that China has increased its holdings to $1.17 trillion, Japan to $1.08 trillion and Brazil to $237 billion. In addition China's "satellites" now hold $184 billion (Taiwan) and $139 billion (Hong Kong), bringing the total for the three "countries" to nearly $1.5 trillion, 10% of all Treasuries outstanding. The UK has reduced its holdings to $112 billion as of March 2012. Russia, which radically slashed its U.S. debt holdings in 2008 now has increased them to $147 billion.
- U.S. Lets China Bypass Wall Street For Treasury Orders: Reuters Exclusive (Emily Flitter, Reuters, International Business Times, 21 May 2012)
- First US approval for Chinese bank purchase (Shahien Nasiripour, Tom Braithwaite and Henry Sender, Financial Times, 10 May 2012)