Tuesday, May 22, 2012

Evidence of China's growing sophistication as a money manager in the U.S. markets

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

Either the Fat Lady is singing in Mandarin, or idiocy is now distributed to unprecedented levels. It's amazing how much press this article has generated.

This may be the indirect benefit of having Chinese students study at our Harvard Economics Department - the Black Hole hidden at the center of the US economics profession, from which no logic whatsoever is allowed to escape. I'm beginning to think that Harvard Economics is just a front for the NSA, used to baffle, mislead & confuse enemies of our state.  [Now if they could just prevent domestic leakage of nonsense about a fiat national debt & deficit, we'd all be in better shape.  Does the NSA really consider professionally expanded fallacies of scale to be affordable collateral damage?]

Moving on, if China wants to waste brain cycles on better ways to optimize an inane investment ... fine. It may even be savvy policy by us to "help" them extend their confusion - but then again it may just be zombie bureaucrats "doing their job" of personally distributing small amounts of US financial assets to local bars & other establishments.

As an aside, the level of idiocy expressed by the security-panicked NeoCons in this article is downright embarrassing. One tires of repeatedly beating that undead, zombie horse (who let Brad Setser anywhere near the NEC or NSC?), so let's just move on to some other points.

Despite the considerable BS, there are actually some useful details in the article, that are not widely appreciated.

"Primary dealers are not allowed to charge customers money to bid on their behalf at Treasury auctions"  [Ought to sail right over the heads of some Deficit Terrorists.]

"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." [fine; let 'em]

There's even one step forward for this journalist:
"The Chinese use Treasuries to house the dollars they receive from selling goods to the United States,"   [looking good ...]

Countered by two steps back!
"while the U.S. government is happy to see such strong demand for its debt because it keeps interest rates low."
[BMHOTK!  Whatever. You can feed a journalist data, but you can't make them think.  Is zombie horse meat added to hamburger in journalism school cafeterias?]

There was also this comical tidbit. "To safeguard against hackers, Treasury officials upgraded the system that allows China to access the bidding process."
Why not? An upgraded system has solved every other cybersecurity concern. The upgrade could have been the act of saying it was upgraded. Besides, the biggest danger of anyone breaking into that data stream may be that the poor hacker dies of boredom. It'd be like diverting a "proprietary" audio stream and finding nothing except Bee Gee's music.   Odd as it seems, the Bee Gee's were once taken as evidence of growing, even award winning sophistication in music management.


BfO said...

Hi Mike

Sorry, to spam this on several of your posts, but have you seen this HBS case study?


This has Kyle Bass and Harvard economics. Will you be having a field day?

Matt Franko said...

they are in effect letting the Chinese have access to Treasury Direct.


Rates for short term USTs are effectively negative when you take into account Dealer spreads (right column):


So the Chinese would be having to accept a negative yield if they have to go thru Dealers.

Different for the Japanese as Treasury has accepted Japanese banks as PDs of USTs:


So Japanese pols probably dont complain about the neg yields as they receive kickbacks from the Japanese PDs taking the spreads.

Chinese probably complained about this and they let them go Treasury Direct until such time as US would allow Chinese banks to become PDs of USTs.

This seems far off as just a few weeks ago, the US has first ever permitted the first Chinese owned US commercial bank....


The Chinese will have to build up a track record in plain banking for a while before they will let them be a PD of USTs.


Anonymous said...

Leverage over the United States ... Lol ... As you say, quite correctly, it's a consequence of the trade deficit. Seems to me that the leverage is really the other way. A mercantilist economy requires a manhandled exchange rate in order to not only compete, but to avoid an inevitable social catastrophe the moment growth slows a few percentage points. There is nothing else to take up the slack - nothing. And while they have been buying Treasuries by the tanker load, all the while they are complaining about the deteriorating yields, QE, whatever.

As much as I like Setser's analysis along his areas of expertise, there really is no turmoil to be expected. Not only is a Chinese sale of bonds so self-destructive it's scary (and, therefore, as low a probabilty as you can get), but the Fed has got kinda good at buying bonds and increasing system reserves without inflationary impact. I'm sure they can cope with a short term cash infusion, and that markets would see it for what it is, a chance to buy USD temporarily cheaply.

The idea that China sells Treasuries is synonymous with exiting USD en masse. Why? Do they think that the 35pc of GDP that is Chinese Consumption can absorb their production? Love to see that.


Roger Erickson said...

Thanks for your additional comments, Matt. Reuters should make you editor of their financial desk - couldn't help but improve their level of expertise.

Matt Franko said...

The Yahoo posse weighs in:


Aron and Henry.