Chinese Banks adding fuel to U.S. Subprime Crisis

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Aug 24 2007
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While the Federal Reserve is busy fighting and calming the internal subprime mortgage crisis internally, one external force could and might be the catalyst that would add fuel to the already spooky wildfire. This factor is none other than the U.S. economic rival China.

Starting with banks, Chinese banks are sending some early alerts that might create a second wave of tsunami of panic at the later stage.

  • china banksChina’s biggest lender, Industrial & Commercial Bank of China (ICBC), reported earlier that its subprime mortgage-backed securities were valued at $1.23 billion at the end of June, accounting for only 0.3 percent of its total securities investment.
  • Bank of China reported that it holds $9.65 billion in subprime asset-backed securities and collateralized debt obligations, equivalent to about 3.8 percent of its total securities investments. Its’ Hong Kong stock price fell by as much as 8.1 percent on Friday in reaction to the disclosure.
  • Bank of China’s Hong Kong unit, BOC Hong Kong (Holdings) reported it had $1.6 billion in subprime-linked securities, making up 1.2 percent of its total assets.

At this stage, it appears the fire is within control if it’s true that the biggest bank exposed to subprime mortgage is Bank of China. Analysts also noted that since all the asset-backed securities had ratings of “A” or above, the risk should be minimal. Nevertheless, we’ve to wait for the full earning reports from other banks to determine the risks and exposures.

Even if other Chinese banks have higher percentage of exposure to the subprime problem, it’s unlikely that the dollar-reserve-rich China will allow its banks to be dragged into the crisis to the level which can undermine the country’s economy. China government does not worry about the losses in terms of dollars and cents. What the government worries is the psychology effect which could create panic and fear into the equity markets spanning from Shanghai to Hong Kong if it’s not handled properly.

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