China to reveal limited subprime losses
By Richard McGregor and Jamil Anderlini in Beijing
Chinese state lenders, including the Bank of China, are expected to announce losses from their exposure to the US subprime lending market when they release their first-half results in the coming weeks.
But the exposure of China, both in terms of the government’s hundreds of billions of dollars of US dollar holdings and the overseas investments of its commercial banks, appears relatively limited.
If China can contain the fallout from the subprime crisis spreading through financial markets in the west, the government will be able to thank its conservative state investment policies and maintenance of capital controls.
For Beijing’s leaders, who have presided over high economic growth through the numerous foreign and domestic crises over the past decade, China’s ability to avoid yet another foreign catastrophe will be a confidence booster.
China’s large state banks have increased their foreign investments in recent years, following their restructurings and successful listings overseas. But they have not assumed huge new risks in the process, analysts say.
“Chinese banks have traditionally been very cautious in their overseas risk exposure,” said Jing Ulrich, of JPMorgan in Hong Kong, pointing out that they had bought only a small amount of higher-rated collateralised debt obligations, the bundled mortgages at the centre of the crisis. “Any losses should be minimal compared to the banks’ total assets.”
Charlene Chu, a Beijing-based banking analyst for Fitch, the ratings agency, said that the “bigger impact may come from the indirect effects of this volatility on investor confidence and the economic climate”.
The Bank of China, the country’s largest foreign exchange bank, told investors last week to expect losses, and bank officials have said information on its subprime exposure will be released with half-year results in late August. But “the Chinese government is much more concerned right now about internal issues, such as inflation”, a senior official responsible for regulating financial institutions told the Financial Times.
China’s government, through the investment overseas of its $1,330bn (€972bn, £659bn) in foreign exchange reserves, has a much larger exposure than commercial banks, but an equally conservative investment philosophy.
The precise make-up of China’s reserves is a state secret, but about 70 per cent are believed to be held in US dollar instruments. In recent years, China has shifted from an almost complete focus on US Treasuries to mortgage-backed securities.
Brad Setser, senior economist at RGE Monitor, calculates that China has about $100bn in mortgage-backed securities, based on data from early 2006, the latest available.
The $100bn figure represents about six per cent of China’s broad reserves.
But Mr Setser said China did not appear to have any exposure to the US subprime mortgage market. “Over 90 per cent of China’s dollar portfolio was in instruments that did not have credit risk,” he said. “If you are a central bank and get caught on [something like subprime], it implies you were really taking a lot of risk.”
