China hit by subprime credit crisis

* Chinese bank earnings will suffer because of subprime crisis and tighter monetary policy and macro-economic controls

* Chinese regulators and banks are studying the credit crisis
* Beijing expects bad loans may rebound this year (Adds comments from China’s banking regulator)
By George Chen
SHANGHAI, Jan 21 (Reuters) – Earnings at Chinese banks will probably be hit this year by the snowballing U.S. subprime mortgage crisis and Beijing’s moves to cool the economy, the president of the country’s sixth-biggest bank said on Monday.
“We have to be very realistic: we are facing many challenges this year which are not only from home but also abroad,” China Merchants Bank Co  President Ma Weihua told Reuters in an interview.
The bank, China’s biggest non-state lender, made some U.S. subprime-related investments in 2004 and sold them two years later for 13.4 percent returns.
But the country’s bigger, state-owned banks could suffer.
Bank of China may suffer a 2007 loss because of a big write-down on billions of dollars of U.S. subprime-related investments, the South China Morning Post reported on Monday, sending Hong Kong-listed shares in the lender tumbling 6.4 percent.
Quoting unidentified sources, the newspaper said Chinese banking regulators had warned the country’s leadership that Bank of China and two other state banks would make provisions for all their assets hit by U.S. mortgage defaults.
In August, Bank of China  surprised investors by announcing it had US$9.65 billion of subprime-related securities on its books. That exposure was worth $7.95 billion by the end of September, and the bank said a month later it booked $643 million in provisions and reserves for subprime-related investments.
Ma said the subprime crisis and global credit crunch, which has forced Wall Street banks such as Citigroup and Merrill Lynch into write-downs in the tens of billions of dollars, was “completely a new thing” for Chinese regulators and banks.
Ma’s comments are in line with the country’s banking regulator who said in a statement published on its Web site ( on Monday that non-perfoming loans of Chinese banks may rebound this year as credit risk grows.
“The global financial situation is becoming more complicated due to the U.S. credit crisis,” Jiang Dingzhi, vice chairman of China Banking Regulatory Commission, said in a statement.
“Risks from capital markets and property sectors will increase the credit risk in the banking sector,” Jiang said. “The pressure of non-performing loans to rebound is rising.”
The non-performing loan ratio of China’s big commercial lenders fell to 6.7 percent at the end of 2007 from 7.51 percent a year earlier, the banking regulator said last week.
Big Chinese banks have seen their non-performing loan ratios decline for more than half a decade due partly to government bail-outs and stock market listings.
“If you talk about market value, Merchants Bank’s market value has already surpassed Deutsche Bank , but this doesn’t necessarily mean the level of our corporate governance is better than the German bank.”
Ma said the Chinese banking industry was still studying the issue to see how it would be affected.
China’s top banking regulator, Liu Mingkang, recently warned senior bankers to be fully conscious of potential risks from the credit crunch, two bankers briefed on the meeting told Reuters.
The two bankers declined to be identified because they were not authorised to reveal the information to the media.
Ma said the Beijing Olympics would benefit Chinese banks, adding that Merchants Bank had doubled the number of credit cards issued to 20 million during 2007, thanks to an Olympics-related marketing campaign.
But he expected the Chinese government to continue to tighten monetary policy and economic controls. Beijing has raised interest rates and bank reserve requirements several times in the last year, as well as telling banks to cut down on property loans. (Additional reporting by Alison Leung in HONG KONG and Eadie Chen in BEIJING; Editing by Jan Dahinten)

One response to “China hit by subprime credit crisis

  1. Well, we see remarkable things happening today (Jan 22’nd) as the Fed moves to cut their key rate by 75 basis points.

    The US market is likely to be tumultuous today, as the futures for the Dow signal a possible loss of hundreds of points. Will Tuesday, Jan 22’nd become known as “Black Tuesday”? We’ll see.

    But Americans must ask themselves why these powerful forces are happening in our markets. Let me single out two reasons that I think are contributing:

    * A number of investors have had the feeling that the US stock market has been subject to interference over the past year. I am talking about possible actions by the Working Group on Finanical Markets (i.e. the PPT). I personally do not believe that the PPT is the “Bogey Man” behind every unusual move of the market, or that they act often. But there have certainly been some days in the last year when it seems like the Dow should have closed significantly lower – but did not. If indeed the PPT has been more active under the leadership of Mr Paulson (US Treasury), then they have only delayed a “day of reckoning”. It is not possible to have the US equity market out of balance with the credit markets. Professionals working in the credit markets have commented that they have “never seen things so bad” in their entire careers. So how can US stocks be doing so well? Well … how can they??

    * There has been a vast build-up of both financial leverage and debt in the US economic system. Worse still, many of these transactions are hidden from the public view as “over the counter” private negotiations. This lack of tranparency places great risk in our financial system. If the public could see these transactions, then individual investors might be able to react clearly to the situtation. But when everything is hidden from view – you wind up getting enormous moves in market prices that take the public by surprise.

    We have to ask … where were the principles of sound central banking? Where were the regulators who allowed this enormous build-up of leverage and secret transactions? Many people will point their fingers today at Mr Bernanke and the Fed. But the roots of these oversights go back over the last 10-20 years of American finances and banking.

    These are deeper issues that Americans need to consider – and to fix – in our financial system.


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