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BIZCHINA / Weekly Roundup

Subprime crisis not a 'direct threat'

By Debasish Roy Chowdhury (China Daily)
Updated: 2007-08-14 11:53

As financial markets across the globe brace for another week of
uncertainty triggered by the US subprime mortgage crisis, analysts are
confident that China, especially the mainland, will be able to hold its
own.

Experts are of the view that China may not be directly hit by the crisis
as a result of its strong economic fundamentals, limited exposure to this
particular variety of assets, and the mainland's restricted linkage with
the international financial system. But they warn that if the subprime
housing mortgage crisis snowballs and results in a severe economic
downturn in the West, Chinese exports may be indirectly hurt in the
longer term.

Subprime lending refers to loans to people who have poor credit histories
and low incomes. These high-risk housing mortgages thus come at high
interest rates. Over time, these mortgages have come to be bundled into
other forms of securities and sold in the global credit markets.

Related readings:
?Sub prime loan crises may affect some Chinese banks
?BOC: Mortgage crisis report 'not accurate'

The genesis

The current crisis began as subprime mortgage defaults began to spiral as
a result of higher interest rates and the bursting of the US housing
bubble. With the US Federal Reserve consistently raising interest rates,
borrowing costs there have risen from 1 percent to 5.25 percent in just
two years. Increasing defaults and foreclosures have taken down one US
housing mortgage company after another since late 2006.

But the wider problem is that banks, mostly in the US and Europe, have
bought much of these repackaged subprime debts, with serial defaults and
bankruptcies reducing the value of this asset and making it difficult to
resell it. At least five hedge funds have blown up, including two of Bear
Stearns and two by Australia's Macquarie Bank Ltd. France's BNP Paribas
has suspended three investment funds while two Goldman Sachs Group hedge
funds are also reportedly suffering subprime-related losses.

In China, two of the Big Four banks have admitted to having been affected
by the subprime crisis. Though neither Bank of China nor China
Construction Bank has disclosed the extent of their exposure to the
subprime market, Bank of China has said its losses could be "several
million US dollars".

The US turmoil and fears of a global credit squeeze have been dragging
down regional stocks for weeks. Japan's Nikkei 225 Stock Average has slid
for four straight weeks while Hong Kong's Hang Seng Index has had its
biggest weekly loss in five months. South Korea's Kospi has posted its
biggest one-day loss in three years and Australia's key index has hit the
lowest mark in six years.

Only mainland stocks have so far stood firm. Drawing succor from this
resilience of A shares, analysts are confident that this problem has very
little chance of spilling over to the mainland.

Jun Ma, China chief economist of Deutsche Bank, said: "There's very
little linkage between China and subprimes except through a few financial
institutions. Share prices have already reacted to the subprime issue, I
would say overreacted in some cases. The impact is mainly sentimental."

(For more biz stories, please visit Industry Updates)

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