The United States has allowed China to purchase government debt directly from the Treasury Department, bypassing primary dealers in Wall Street. According to Reuters, the agreement is the Treasury's first-ever direct relationship with a foreign government.

Under the arrangement, the People's Bank of China, the single largest buyer of US debt, will be able to purchase bonds via a direct computer link to the Treasury's auction system. However, if China wants to sell the bonds it still has to go through the market.

The documents viewed by Reuters reveal that China has been using this method to invest in US debt since June 2011.

While the change was not announced to the public or primary dealers, bypassing Wall Street may help China obtain US debt at a better price by reducing public information of its bidding habits.

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As primary dealers are not allowed to charge commission on Treasury bids, Reuters explains how China benefits from this unique scheme:

Instead, 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.

Additionally, Reuters adds that the Treasury was keen to keep the changes under wraps because of the politically sensitive nature of Sino-American creditor-debtor relationship.

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The granting to China of direct bidder status may be controversial because some government officials are concerned that China has gained too much leverage over the United States through its large Treasury holdings.

However, Treasury officials have long maintained that U.S. debt sales to China are kept separate from politics in a business relationship that benefits both countries.

In particular, the Chinese use Treasuries to house the dollars they receive from selling goods to the United States, while the U.S. government is happy to see such strong demand for its debt because it keeps interest rates low.

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