Cablegate: Positive Chinese Reaction to Fannie Mae And

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UNCLAS SECTION 01 OF 02 BEIJING 003501

SENSITIVE
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STATE FOR EAP/CM

E.O. 12958: N/A
TAGS: ECON EFIN CH
SUBJECT: Positive Chinese Reaction to Fannie Mae and
Freddie Mac Action

REF: Hong Kong 1679

AmConsulate Shanghai contributed to this report.

1. (SBU) Summary: Chinese official and private
reaction to news that the United States Government
would place housing mortgage agencies Freddie Mac and
Fannie Mae under conservatorship was generally
positive. Vice Premier Wang Qishan appreciated the
effort. Finance Assistant Minister Zhu Guangyao hoped
to minimize the political cost to the Chinese
government of the crisis. Stock market and business
commentators also generally endorsed the move, while
noting that most Chinese commercial entities are not
overly exposed to Fannie and Freddie debt. End
summary.

Official Central Bank Reaction
------------------------------

2. (U) The Chinese Central bank spokesperson today
made a statement commenting on the U.S. government
takeover of Freddie Mac and Fannie Mae. He said that
"the People's Bank of China believes that these measures
are positive and will stabilize the market and boost
confidence." He added that "the U.S. government should
conscientiously take responsibility for maintaining the
stability of the global financial market and protecting the
interests of investors."

Vice Premier Wang Qishan
------------------------

3. (SBU) In a phone call with U.S. Treasury Secretary Henry
Paulson, Vice Premier Wang Qishan said he appreciated the
effort to protect both creditors and taxpayers. If
creditors are not protected, he said, the international
financial system would be adversely affected. Given that
U.S. agency debt accounts for a large share of Chinese
reserves, USG policies towards this debt greatly impacts
China. He said he needs time to study the action and
market reaction, and then will provide a response.

4. (SBU) Wang thought that 75 percent of GSE debt was held
by U.S. investors. While China is the largest foreign
investor, it only accounts for one-third of foreign-held
agency debt. Wang stated that U.S., not Chinese,
investors' reaction was critical. He said that if U.S.
market confidence is not restored, it will be difficult for
China to maintain confidence in this debt.

5. (SBU) Wang noted that the Chinese government does not
want the U.S. economy to experience major problems. U.S.-
China economic cooperation is strong. The USG policies on
agency debt were a test of whether investors would be
protected.

MOF Assistant Minister
----------------------

6. (SBU) Assistant Finance Minister Zhu Guangyao said that
orderly and deft management of this problem is in China's
interest. Zhu said that China holds USD400 billion in
Freddie and Fannie assets. (Note: This is most likely is
based on June 2007 Treasury data, which reports Chinese
holdings at $376 billion. Actual holding are most likely
higher because this does not include holdings in third
country funds in which Chinese entities have invested, and
Chinese overseas assets increased by USD 476 billion
between June 2007 and June 2008.) Because the government
faces a public opinion backlash associated with a loss in
the RMB value of its foreign assets (both due to
appreciation of the RMB and declines in the market value of
its holdings) China wants to minimize the political costs
of this crisis, said Zhu.

7. (SBU) Zhu noted that the United States had been telling
the Chinese government for weeks that the tools provided by
Congress were sufficient to handle the situation at Fannie
Mae and Freddie Mac. He questioned why the USG had now
turned to a conservatorship.

Market Reaction
---------------

8. (SBU) Shanghai Stock Exchange Deputy Director of Global
Business Development Chao Kejian said that the takeover of
Fannie/Freddie was very good news for China. China's
banking sector stocks showed comparatively stable prices in
wake of this news, even in the face of overall economic and

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property sector weakness.

9. (SBU) Chao speculated that the Central Government was
slightly more likely to take measures to support China's
stock market in the wake of the USG's action, but any such
move would await a decision by Vice Premier Wang
Qishan. The Central Government on balance is still very
cautious about taking measures to support China's stock
market.

Business Reaction
-----------------

10. (U) Spokesman for the Bank of China Wang Zhaowen said
"we think it's a very positive move by the United States
government. It has come from being an invisible regulator
to the front lines to save the market."

11. (SBU) Haitong Securities Macro Analyst Wu Yiping felt
the U.S. government action would have little direct impact
on the Chinese financial industry. Wu claimed that the
banking sector has the largest exposure to Fannie and
Freddie debt, although insurance companies such as Pingan
and China Life Insurance might also hold some debt. She
said Chinese investors saw the USG move as a positive
signal for the global financial market.

12. (SBU) Bank of Communication Manager Chiu Gaoqing
claimed that, although BoCOM had sold its Fannie and
Freddie investments, and thus was not directly affected by
the takeover, the move might bring some stability to global
financial markets.

Commercial Exposure
-------------------

13. (U) China Business News reports that, according to the
latest survey by the China Banking Regulatory Commission
(CBRC), at the end of June 14 banks held Fannie and Freddie
debt valued at around USD31 billion, with the six listed
commercial banks holding over USD25 billion in debt. The
Bank of China was the largest investor, with USD17.3
billion in debt.

14. (U) In the last month, all of the listed banks have
announced that they are drawing down their Fannie and
Freddie debt. Bank of China's Fannie and Freddie exposure
decreased by around USD7.14 billion.

Comment
-------

15. (SBU) The Chinese government's foreign exchange
managers have recently received a fair amount of public
criticism for taking large losses on Chinese foreign assets
due to the appreciation of the RMB. The somewhat defensive
call from the PBOC for the United States to "protect
investors' interests" appears to reflect these attacks.
While financial officials tend to acknowledge that Chinese
international reserve holdings are too large for them to
meaningfully adjust asset allocations without having
significant and adverse market impacts on their holdings,
this is not generally understood by senior officials and
the general public. Government interlocutors have
consistently stressed that, given the role of the US dollar
as a reserve currency, the U.S. government has a
responsibility to take into account any impact on the
international financial system when addressing problems in
government-sponsored enterprises. Thus, government finance
officials seem genuinely appreciative that the U.S.
government has acted to safeguard the interests of holders
of Freddie and Fannie debt.

16. (SBU) Most Chinese commercial entities beyond the
largest state-owned banks are not very exposed to U.S.
agency debt. They nevertheless welcomed the USG move to
stabilize international financial markets, given concerns
that financial stress could further weaken the growth of
U.S. domestic demand and Chinese exports.

RANDT

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