Guest Post: Is China Really Liquidating Treasuries?

Tyler Durden's picture

Submitted by John Aziz of Azizonomics

Is China Really Liquidating Treasuries?

The news that China has become the first sovereign to establish a direct sales relationship with the U.S. Treasury (therefore cutting out the middleman and bypassing Wall Street ) raises a few interesting questions.

From Reuters:

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.


The relationship means the People’s Bank of China buys U.S. debt using a different method than any other central bank in the world.


The other central banks, including the Bank of Japan, which has a large appetite for Treasuries, place orders for U.S. debt with major Wall Street banks designated by the government as primary dealers. Those dealers then bid on their behalf at Treasury auctions.


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.

The biggest Chinese outflows in U.S. Treasuries occurred in the months following the establishment of this relationship:

Which begs the question for some analysts — was China really selling? Or was China stealthily buying direct from the U.S. Treasury (unrecorded) and selling back into Wall Street (recorded)?

Well, according to the Treasury, the Treasury International Capital data seeks to record foreign holdings of U.S. securities, not just the flows, and given that the Treasury was the seller in these direct transactions (and so obviously was aware of them) there’s no reason to believe that they wouldn’t include any such direct outflows in the data. That suggests very strongly that yes, China really was selling.

And maybe the real reason that the Treasury offered China direct access (thus cutting out the middleman and offering China cheaper access than ever) was precisely because China was selling, and because the Treasury was concerned about the effect on rates, and wanted to give China some incentive to keep buying. As Jon Huntsman noted in a 2010 cable leaked by Wikileaks, the PBOC has felt pressured to keep buying, and as various PBOC officials have hinted in recent months, China is actively seeking to convert out of treasuries and into gold. And that makes sense — treasuries are yielding ever deeper negative real rates. People holding treasuries are losing their purchasing power. No wonder the treasury is willing to cut Wall Street out of the deal.

And it isn’t like the Treasury would have taken this move lightly — cutting Wall Street out of the equation is a slap in the face to Wall Street.

This raises a much more interesting question — now that the PBOC has effectively been upgraded to primary dealer status, would the Fed start buying treasuries directly from the PBOC in order to manage rates downward and prevent a spike in Treasury borrowing costs should China choose to quicken the pace of a future liquidation, potentially bursting the treasury bubble?

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ACP's picture

China screwed themselves with the currency peg. Now they're stuck.

redpill's picture

All this hollow bullshit talk about "labelling China a currency manipulator" and here we discover they have a direct line to our Treasury at the invitation of the United States government.  Treasonous fucks we have running this country.



How long till' we just cut Wall Street out of everything? 

knukles's picture

How long tell we cut everything out of Wall Street?

engineertheeconomy's picture

When was the last time that you can remember that the gov told the truth about anything?

Harlequin001's picture

and all because America is China's bitch, oh yeah...

Solution = Gold standard, wipe the lot, tell China with its 2 billion poor people to go get fucked...

Oh yeah...

print money to buy food.

stop printing money, cut social security and tell everyone to go get a fucking job, oh yeah...

lazy bastards revolt. Oh no....

cranky-old-geezer's picture



and all because America is China's bitch ...

Yep, we look down our noses at the rest of the world, telling everybody what they should be doing,

...and we're quietly begging China to buy our debt because we can't control our spending ...and trying to hide it from the public.

World superpower ...or gutless cowards?

Bohm Squad's picture

Most dangerous drunk in the bar.

Max Fischer's picture



And maybe the real reason that the Treasury offered China direct access (thus cutting out the middleman and offering China cheaper access than ever) was precisely because China was selling, and because the Treasury was concerned about the effect on rates, and wanted to give China some incentive to keep buying.


There is far more to the story.  

The "direct buyer" arrangement between China and the US Treasury was originally crafted after Freddie/Fannie got booted from the NYSE. This was a major concern for the Chinese, which I'll explain in a minute. At the time, this direct buyer agreement was largely a symbolic move to demonstrate to the Chinese that we respect their position as our largest creditor, and we will do what is necessary to maintain our good standing with them, even giving them the "privilege" of being a pseudo primary dealer.  Not only does it allow China to buy our debt without paying a Wall Street vig, it also allows our government to better disguise the bid to cover in case there was ever the slightest hint of a "bid problem," if you know what I mean. So... win/win for both China and the US.  

Circling back to the Freddie/Fannie debacle, its delisting from the NYSE made the bonds of FRE/FNM worth less, which, in turn, made the Chinese extremely nervous; in 2010, nearly 20% of China's foreign reserves (almost $400B) were held as FRE/FNM bonds. Behind closed doors, it was promised to the Chinese that if QE wasn't successful in bringing down mortgage rates and putting a bid under those FRE/FNM bonds, the Fed would craft a program to do exactly that; hence, Operation Twist was crafted. While the Fed could push down treasury rates with their QE programs, mortgage rates were slow to follow suit. Operation Twist was a very deliberate assault on those mortgage rates and a nod to the Chinese that we will do what is necessary to protect their investments in us.  After all, China bought those FRE/FNM bonds under the understanding that they were AAA. If we burn the Chinese with $400B in "AAA" agency debt, they'll never buy another bond from us ever again.    

It is interesting to me that the first direct purchase of US debt by the Chinese occurred just prior to the commencement of Operation Twist. Maybe the timing is nothing, but it sorta looks like the US is making it as easy as possible for China to continue buying our debt, while we scratch their back buy putting a bid under their $400B in foreign reserves through Operation Twist.  In short, the "direct buyer" program was agreed on after the FRE/FNM delisting, and commenced last summer just prior to Operation Twist. 



Bananamerican's picture

your own informed speculation?

sounds plausible.....any urls or are YOU the "url"

A Nanny Moose's picture

We're gonna need a bigger debt limit.

Harlequin001's picture

How about 'motorised wheelbarrows'

There's got to be an opening there somewhere...

Chuck Walla's picture

How about 'motorised wheelbarrows'

There's got to be an opening there somewhere...


Obviously, a student of Weimar.

The Disappointed's picture

Old (and offensive) joke:

You know what all the kids of the Donner Party had in common? They was all ate(8)!


Stuck on Zero's picture

I'm confused.  Please explain.  The Chinese sell their 0% interest T Bills and receive cash that returns 0% interest.  It's still paper.


Money Squid's picture

selling Ts to get FRNs is paper to paper, but using FRNs to buy gold is buying money with paper.

cynicalskeptic's picture

China's converting paper $US into TANGIBLE ASSETS - mining companies in Australia and South America, farmland in Africa, contracts for oil with central asian countries ..... China's not stupid - they're trying to turn all that soon to be worth a lot less (or nothign) paper into REAL Value (and yes, that includes gold - they also have a long term contract with some NA producers to refine their output ... and guess who leeps the refined product)

ITrustMyGut's picture



But not only into Gold, etc assets, but LAND - US Land... we WILL see PRC Troops on our soil eventually.. to take ownership of THEIR lands... they've shit all over thier lands... time to migrate to (our) greener pastures...

Bizaro World's picture

Redpill, Seriously, treason is the correct terminology. China now a primary dealer, couldn't make this s*** up in my wildest dreams. Everyday the rabbit hole gets deeper, props to ZH for keeping us in the know....for now at least.

I think I need a chin strap for my tinfoil hat, it's gonna be a bumpy ride.

palmereldritch's picture

And I thought it was just a matter of time AFTER the recent story below that they became primary dealers...

I don't think they can make the tinfoil thick enough anymore...

hawks5999's picture

Props to aziz for the analysis. 

The Disappointed's picture

Hope that your protective helmet is really made of Ag, not Sn nor Al.

Gonna b bumpier than one can imagine, today (imho)

Clever Name's picture

Like we didnt know that was bs already. The sheep have never given it a second thought and just said "Damn Chinese!" when hearing 'currency manipulation' on the news as their eyes gloss over, then proceed to Wally World to purchase cheap Chinese goods.

slewie the pi-rat's picture

and the canadians are even worse

thanks for the reminder of why we don't watch TV

very cl_evR!

palmereldritch's picture

"Treasonous fucks we have running this country."'ll wake the children

vast-dom's picture

"That suggests very strongly that yes, China really was selling."




That suggests very strongly that yes, China really was RE-selling.


If this article is properly researched and the money is followed all the way to the top, then this is Pulitzer prize winning journalism -- i mean a la Watergate.


Now JoP et. al. may go to China to buy and even sell -- even Wall St. itself may do this too, esp if China really is trying to get more into gold, etc. Ergo China the de facto primary dealer that will not pay taxes, etc etc etc


PS Fuck the prizes, but the reading of damning implications would be something...

sitenine's picture

OT, but I thought you would want to see this:

Apparently, if you post anonymously on the internet (yeah, that's pretty broad), the State of New York wants to know who you are, and they appear determined to write it into law.

ACP's picture
AN ACT to amend the civil rights law, in relation to protecting a person's right to know who is behind an anonymous internet posting.


Good post, by the way.
Joe The Plumber's picture

Lol I will confirm my name is joe the plumber. I will even pinky swear. I am curious how they will verify i gave my correct name and IP when my posts come out of a vpn located in vanuatu

Dead Canary's picture

Next step. Everyone who posts will be required to register with the gooberment. (And pay a fee for a posting license of course)

cranky-old-geezer's picture



Someone's right to know who makes an anonymouns posting on the internet?

Anyone still doubt this government has gone freikin looney tunes?

There is no such right all of legal precedent all the way back to the Magna Carta. 

This crazy idea doesn't fit any legal principle and runs contrary to many legal principles.

It's just like saying people have a right to receive welfare other people have to pay for.  Welfare is not a right.  Welfare has no basis in legal theory at all.  It's government's crazy distorted attempt to justify taking money from some people and give it to others to buy votes.

This crazy idea is not a right either.  It has no basis in legal theory at all.  It's government's crazy distorted attempt to justify another dose of tyranny, another dose of intrusion into people's lives.

Why don't they just be their fascist selves and make webmasters hand over ID info?

Trying to make it sound like a right?

Are they cowards on top of being crazy?

HD's picture

They can pass any law they want - enforcing is another matter altogether.

palmereldritch's picture

i've played poker against these guys on-line.  They're not so tough

A Nanny Moose's picture

Enforcers will turn a blind eye, until it is convenient.

HD's picture

Honestly - how can they possibly enforce something like that? It's ridiculous. Might as well make it illegal to sing in the shower.

10mm's picture

Hey,don't give them anymore crazy ideas.

Kastorsky's picture

what a piece of fascist shit this sen. tom o'mara is.

carbonmutant's picture

Looks like the Bilderbergs are doing the same thing in the EU.

Mark of the Beast: Bilderberg Pushes Mandatory Internet ID for Europe

While the international ACTA treaty and United States’ CISPA legislation are setting the stage to clamp down on the world wide web, technocrats are working overtime to try to pin down your identity and make sure all your activities are thoroughly monitored and under control.

Clockwork Orange's picture

No worry - Bernanke, Geithner and all of their ponzi-vermin pals feel no pain.

Only Joe Sixpack is screwed, and he deserves every bit of groceries he is now missing, based on his willful ignorance.

Life is good at the top.

Freebird's picture

All your actions are belong to us

mayhem_korner's picture



The battle lines have taken the shape of a continuous circle.

HD's picture

Just another sign America is going the way of Japan - soon good Ol' Ben will own 99.9% of T-bills, never be able to unwind and of course, will just have to keep buying just to keep from drowning...

Yen Cross's picture

Japan is an export economy. Crude is off 10% , and they have a massive savings rate! I'm not dis-agreeing with you.

 Just remember the "SUN" rises in the East! 

Disclaimer: I know the debt/gdp , is an issue.

HD's picture

"Japan is an export economy"

I'm doing my part mate - once you start building Gundams you don't stop. Between the strong Yen and the shipping costs - it's not a cheap hobby...




Coke and Hookers's picture

This is awesome. The fed (re)monetizing Chinese-owned debt! Woohoo!

Sizzurp's picture

Can you think of a better way for China to realize the profits of their bond price appreciation than to sell to the Fed just like everybody else?  China is just getting in on the same game that the rest of the bond speculators have had going for years, front running the fed for easy money.  Money that still has value enough to buy oil, gold, whatever.