How Badly Did China Get Burned By US’s Subprime Mortgage Crisis?

An article in today’s Telegraph suggests that foreign central banks have sold US48B in US treasuries, with US32B in the past two weeks alone, according to figures released by the New York Federal Reserve. China currently holds US1,340B in reserves into other higher-yielding investments. Foremost among these newer investment vehicles is a sovereign-wealth fund.

China has bought US treasuries in order to secure its largest single export market. Effectively, China is lending money to its largest single buyer, since the American people have maxed out their credit. China is buying US treasuries so that Americans continue to have the capability to buy Chinese imports. Since the US dollar has been steadily falling in international markets, especially against the euro, this option is becoming less attractive.

In addition, China bought a large amount of US agency and corporate debt, some of which was backed by, you guessed it, subprime mortgages. For a detailed guesstimate (because it is not public information), take a look at this article by Brad Setser.

There is a good chance that there are some very senior people in Beijing taking a deep gulp as they look at their portfolio of dollar-denominated securities.

If so, that would explain the recent sell-off of US treasuries. And if they start selling, people in Washington are going to start worrying about how to handle US debt. Ultimately, Americans will have to recognize that they have lived beyond their means, and the US standard of living will have to make a downward adjustment, as is beginning to happen now.

So who wants to be president of the US in 2008?

2 Responses to “How Badly Did China Get Burned By US’s Subprime Mortgage Crisis?”

  1. Jeremy says:

    Hi Paul,

    Totally agree with your sentiment – and the fact that the average (median might be more accurate) American needs to adjust their expectations to a lower standard of living.

    The fact is, though, resets on Subprime are only about 1/2 way through, with about an equal amount of resets to occur in Alt-A loans over the next 4 years (see Credit Suisse’s report for the proof)… which means that the extent of China’s (or anyone’s) losses from the housing debacle won’t be fully known for almost half a decade.

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