Wednesday, September 10, 2008

China frets at US risk after Fannie/Freddie bailout

China frets at US risk after Fannie/Freddie bailout

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The U.S. Treasury's takeover of Fannie Mae and Freddie Mac is good news in the short term for China, the biggest holder of the giant mortgage lenders' debt, but Beijing's huge U.S. exposure still poses a serious risk, a prominent government researcher said on Monday.

China owned $376 billion of debt issued by U.S. government agencies, principally Fannie and Freddie, as of mid-2007.

The seizure of the two firms, prompted by worries over their shrinking capital, was the latest in a series of emergency steps taken by U.S. authorities to quell a year-long credit crisis that has helped push many economies toward recession. [ID:nN07479172]

"China has bought a lot of asset-backed securities, and there might be short-term improvement in price," said He Fan, an economist with the Chinese Academy of Social Sciences.

But, taking a longer view, he said the bailout posed a problem: if the Treasury issues new debt to fund the rescue, should China be a buyer or not?

"For China, whether or not you buy the new treasuries, there will be losses: if you buy them, you're getting deeper in the hole; if you don't buy, your existing holdings will lose value," He said.

The Treasury's equity stake could reach $100 billion in each of the lenders, which own or guarantee almost half of America's $12 trillion in home loans, but it said the ultimate cost of the rescue plan depends on how well the companies perform.

He said the takeover was the last resort for the U.S. government, underlining that the credit crunch was far from over.

"This shows that the risks involved are greater than we thought. As such, Chinese banks should be cautious and prudent," the researcher added.

Bank of China said on Aug. 29 it had slashed its exposure to Fannie and Freddie to $12.67 billion as of Aug. 25 from $17.3 billion at the end of June.

Vice-Premier Wang Qishan, who is in overall charge of economic and financial policies, did not comment directly on the two agencies' woes. But, speaking in the southern city of Xiamen, he said the credit crisis was having "quite a serious impact".

Although the takeover of the mortgage lenders was a reminder of the investment risks China is taking, He said the country had little room to diversify its $1.8 trillion in currency reserves.

Buying non-government dollar bonds would be even riskier, while the euro is expensive and yields in Japan are low.

"If we don't buy U.S. treasuries and ABS, what else we can buy?" He said. "China just has no way to avoid the risks. Whatever we do, we have to bear the losses."

There was a vigorous reaction among Chinese Internet users.

A blogger on www.163.com said "a capitalist country is now acting to save the market and protect investors", whereas China's government had sat idly by during a 64 percent plunge in the Shanghai stock market since last October.

"How can Chinese stock investors not be sad? How can they not lose confidence?" the post said.

The main Shanghai index <.SSEC> shed 2 percent on Monday, touching a fresh 20-month low, despite a rally elsewhere in Asia triggered by the takeover of the two firms. "Hope that China's stock market will get government help like Fannie Mae and Freddie Mac, not just lip service," a blogger named "Bang Ni" on sina.com.cn said

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