The State Administration of Foreign Exchange of China (SAFE) said yesterday that it has been receiving regular payments of both interest and principle on the bonds of two US mortgage financing giants, Fannie Mae and Freddie Mac, which China holds.
Earlier, some Chinese newspapers including the China Business News and the Economic Reference News, reported that the government's foreign exchange regulator could face astronomical losses of up to $450 billion on its holdings of bonds and securities issued by the two U.S. government supported entities.
The Obama administration is about to release a plan to the US Congress as early as Friday which is said to chart three options on resolving financially troubled Fannie Mae and Freddie Mac while not roiling a jittery housing market that was battered during the 2008-09 financial turmoil. One of the options is reportedly that the two mortgage giants could gradually lose government back-up and be privatized, according to U.S. media reports.
Nearly all the Chinese business newspapers quoted Lu Zhengwei, a chief economist with the Industrial Bank Co. of China, who issued a report this week warning of the rising risks in China's holdings of Fannie and Freddie bonds. Lu estimated that the country's total holdings are around $500 billion, but did not offer his estimate as to the extent of potential losses.
According to the U.S Treasury Department's report on foreign holdings of U.S. securities, China held $454 billion of long-term U.S. agency debt as of June 30, 2009. That includes $358 billion of "asset backed securities...backed primarily by home mortgages," and $96 billion of other long-term agency debt.
SAFE said in its statement it earned an annual return of around 6% on Fannie and Freddie bonds between 2008 and 2010.
The statement said that China has never invested in the stock of the two US companies, so it hasn't been affected by the tumbling of their stock prices.
