'No losses' on Fannie, Freddie holdings
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Recent media reports said China may lose up to US$450 billion on its holding of Fannie Mae and Freddie Mac bonds. |
China has suffered no losses due to its holdings in bonds related to American mortgage giants Fannie Mae and Freddie Mac, the State Administration of Foreign Exchange said Friday.
Responding to media claims of huge losses, the administration said: "So far, the repayments by Fannie Mae and Freddie Mac are normal and we have never had a loss in this investment. It is groundless for some media to report China had a loss up to US$450 billion in these two firms."
As China's foreign exchange reserves are not invested in Fannie Mae and Freddie Mac stock, the country did not get hurt in the share price slump and delisting of the two mortgage giants, the administration said.
However, analysts say China should actively reduce its holdings of bonds related to the two firms as the United States Congress may decide not to support a government guarantee of the two mortgage firms, which could face being closed or privatized.
"The US government has long upheld the principle that investors should also bear losses if they expect the government to lend a hand," said Lu Zhengwei, chief economist at Industrial Bank Co. "Chinese investors may encounter huge losses if they don't work actively to cut holdings related to these two firms."
Lu estimated that Chinese institutions owned about US$500 billion worth of bonds issued by the government-backed pair, and urged them to act at appropriate times to curb investment risks.
The likelihood of the US Congress supporting a government guarantee of the mortgage companies is becoming slimmer as the US economy improves, Lu said.
But others said it might be too late.
Sun Lijian, an economics professor at Fudan University, said one big problem was that nobody would buy such holdings at former prices.
"Also, if China slashes its holdings, it will further deteriorate the value of the bond," Sun said.
Sun suggested China might buy into some other undervalued bond products to balance the loss, but that was also risky.
US Treasury Secretary Timothy Geithner was yesterday due to present Congress with options for reducing the government's role in the nation's housing finance system.
In September 2008, the US government bailed out the mortgage firms amidst the financial crisis. But with a rescue fund of more than US$148 billion, the two firms have so far failed to turn in a profit.
It is not immediately known whether or how much China has cut its holdings in the firms. But a US Treasury Department report said foreign governments and central banks had been reducing their ownership of related bonds for a third straight month last November.
Those holdings were cut by a record US$31.4 billion in September last year.
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