As Wall Street reeled from subprime mortgage trouble, China’s banks were in a better mood. This is because their relative lack of experience in overseas financial markets has taught them to steer clear of the risk.
“Chinese banks are not that advanced in investing in sophisticated products,” said May Yan, a vice president at credit ratings agency Moody’s in Hong Kong. “These banks’ investment strategy is generally more conservative and traditional.”
At the time of writing, banks had not yet announced their interim results, which are necessary for an accurate gauge of their exposure to US subprime losses. However, analysts were generally unworried. It is really only Big Four state banks that have substantial investments in overseas markets and they are insulated by their size.
“[Their exposure] is probably not a lot. They are some of the largest banks in the world, so on a relative basis, the exposure is pretty small,” said Charlene Chu, director of the Fitch Ratings financial institutions team in Beijing.
But Chinese banks are likely to suffer some losses nevertheless, with Bank of China (BOC) poised to post the biggest loss. A Goldman Sachs report noted that BOC had the largest US dollar-denominated holdings among Chinese banks – US$90.1 billion in securities.
Even when the banks’ interim results are released, they may not reflect the impact of the subprime crisis. Things began to deteriorate in June, after the first-half accounting period for the interim report had ended.
“Almost everyone has hinted that first-half profitability numbers are going to be extremely strong, but this subprime stuff … is not going to show up in the first-half numbers,” said Chu.
Source of the problem
America’s subprime problems are mainly caused by a drop in the value of collateralized debt obligations, a derivative linked to high-interest housing loans made to people who have poor credit histories. The rot set in as subprime borrowers began defaulting on payments, sending a clutch of subprime mortgage lenders to the brink or beyond it. Banks that had invested heavily in bonds linked to subprime mortgages were the next to get hit, notably two funds run by top US investment bank Bear Stearns, which collapsed in late June.
Panic set in among US investors, sending the country’s stock markets sliding. This has had knock-on effects throughout Asia, with only the Chinese market standing firm while Japan, Korea and Hong Kong slid around it.
However, the crisis may have sounded a warning shot in Beijing. As the government readies its new state investment agency – intended to generate greater returns on a chunk of China’s US$1.3 trillion foreign exchange reserves – meltdowns in foreign markets will become a chief concern.
So far, China has invested its forex conservatively, mainly buying US government bonds. But analysts say it has begun to buy highly rated mortgage-backed securities, although no one knows for sure, since its holdings are not made public. However, the subprime products in crisis are likely to be too risky for the economists managing the government’s portfolio.
“Mortgage-backed securities are a very common product [but] they could get somewhat aggressive because of the huge forex pressure,” said Yan.