China's subprime losses likely to be small

China's state banks are set to confirm that their balance sheets have taken a hit as a result of exposure to the US subprime lending market when first-half financial results are unveiled in the coming weeks. However, despite the country's considerable US dollar holdings and increased foreign investment by state banks in recent years, the impact of the West's subprime fallout is likely to be minimal in China due to a cautious attitude towards overseas risk exposure. About 70% of China's foreign exchange reserves are believed to be held in US dollar-denominated and assets and, in recent years, Beijing's focus has shifted from US Treasuries to mortgage-backed securities. RGE Monitor economist Brad Setser told the Financial Times that, in early 2006, China had around US$100 billion in mortgage-backed securities, just 6% of total reserves and most of it in low-risk assets. The fact that the central bank sold its standard US$3.9 billion in bills to commercial banks on Tuesday – while other countries' central banks have been pumping money into the system – is seen as evidence that the global credit crunch is not affecting China.