Exclusive: U.S. lets China bypass Wall Street for Treasury orders

By Emily Flitter

NEW YORK | Mon May 21, 2012 3:35pm EDT

(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.

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.

"Direct bidding is open to a wide range of investors, but as a matter of general policy we do not comment on individual bidders," said Matt Anderson, a Treasury Department spokesman.

While there is been no prohibition on foreign government entities bidding directly, the Treasury's accommodation of China is unique.

The Treasury's sales of U.S. debt to China have become part of a politically charged public debate about China's role as the largest exporter to the United States and also the country's largest creditor.