China shying from shaky US mortgage
market By Olivia Chung
HONG KONG - While China is eager to invest
a portion of its US$1.33 trillion foreign-exchange
reserve overseas, it is unlikely to take a chance
on buying additional US mortgage-backed securities
(MBS) as they are now considered too risky,
Chinese economists said.
During a recent
trip to Beijing, US Department of Housing and
Urban Development (HUD) Secretary Alphonso Jackson
tried to sell China on the idea of buying more
MBS. Investing in MBS
offers
better returns for China than US Treasury bonds,
and at the same level of risk, Jackson claimed.
He called it a "win-win" situation in a
statement released prior to his Beijing trip.
"China has bought some mortgage-backed securities
from us, but not in great numbers," Jackson said.
China held $414 billion in US Treasury
bonds as of April, according to data compiled by
Bloomberg. And according to HUD's website, as of
June 2006, China held $107.5 billion in MBS, up
from $3 billion in 2003 and $100 million in 2002.
Jackson was particularly keen to persuade China's
central bank to buy more securities from the
Government National Mortgage Association (known
colloquially as Ginnie Mae), a mortgage
association under HUD. (The figures include
securities offered by Ginnie Mae, the Federal
National Mortgage Association and the Federal Home
Loan Mortgage Corp, without providing a breakdown
of each agency's holdings.)
"The Chinese
economy is benefiting from high-yielding, safe
investments in US mortgage-backed securities. Here
at home, American homeowners are benefiting from
lower interest rates on mortgage loans resulting
from greater Chinese demand for these securities,"
Jackson said.
Jackson pressed his MBS case
with People's Bank of China governor Zhou
Xiaochuan, Construction Minister Wang Guangtao,
and officials of Chinese commercial banks. Without
elaborating, Jackson said his department wants to
sign a memorandum of understanding with Wang when
the latter visits the US next month.
However, it promises to be a tough sell
for Jackson. The Chinese government may decline
the offer given the current surge in mortgage
defaults in the US, Chinese economists said.
Moreover, China has invested most of its foreign
reserve funds in US-dollar assets and wants to
diversify its investment.
To improve
macroeconomic stability and reduce upward pressure
on the yuan, China is setting up an investment
agency called the State Investment Co (SIC) to
oversee part of its foreign-exchange-reserve
investments. While the SIC has yet to be
officially launched, it made its first investment
in May by spending $3 billion for a stake in the
US private-equity firm the Blackstone Group.
China's State Administration of Foreign
Exchange (SAFE), which manages the reserves, does
not release figures for the proportion of foreign
reserves held, but it is estimated that China
holds about 70% of its foreign reserves in dollar
assets, including treasury bonds.
Yi
Xianrong, a senior economist and finance professor
with the Chinese Academy of Social Sciences, a
central government think-tank, attributed the
previous surge of mortgage-backed securities
bought by Chinese companies to inexperience in
conducting risk assessments and their
miscalculation of the US property market.
"After seeing how the property prices in
China kept soaring, these Chinese companies never
thought of the US property market as having
problems and they bought a lot of mortgage-backed
securities, particularly in the past two years,"
Yi told Asia Times Online. "Apart from
underestimating the level of risk, the better
returns offered by MBS over US Treasury bonds also
made the Chinese investors unable to judge the
high risk of the US mortgage market."
He
said subprime loans are one reason MBS investments
are risky. Subprime loans are made at higher
interest rates to people are considered bad or
weak credit risks. They generally have interest
rates at least 2-3 percentage points higher than
prime loans.
Of the approximately $7
trillion worth of US mortgage securities, subprime
loans currently account for about 15%. Thirteen
percent of US mortgage delinquencies in the last
quarter of 2006 were from subprime loans and about
30 mortgage companies have gone under in the past
few months, Yi said. "There are significant
financial losses," he said.
Yi said some
bond ratings agencies that advise investors,
including Chinese, also purposely played down the
MBS risk. "Some ratings agencies slapped
investment-grade ratings on mortgage-backed bonds
that they knew they were risky," he charged.
Bond-rating agencies this month finally
downgraded about $12 billion worth of subprime US
mortgage securities, Yi said.
Economist
Shi Weigan echoed Yi's comments. "With a possible
burst in the housing bubble in the US, it's not
the right choice for Beijing to spend
foreign-exchange reserve funds on the US
mortgage-backed securities," Shi said.
Olivia Chung is a senior Asia
Times Online reporter.
(Copyright 2007
Asia Times Online Ltd. All rights reserved. Please
contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
