Last weekend the US government announced a takeover of the two large mortgage financers. The expected move will inject much needed capital into the troubled institutions, diluting shareholdersÆ equity but offering bondholders the explicit backing of the American government.
A sovereign bond analyst says China, which is a large holder of US bonds, would be relieved now that the uncertainty hanging over these agencies has been removed. The mainland holds US agency debt worth $376 billion, way ahead of second-placed Japan, which holds $223 billion worth of agency bonds.
The analyst says the nervousness has been evident in the past few months, as the Bank of China has sold a quarter of its Fannie- and Freddie-related securities since the start of July.
Meanwhile, no government approvals have been granted for substantial offshore investment so far this year, the sovereign bond analyst says.
This may be due in part to the significant paper loss recorded by Chinese firms, following some swift purchases of US assets last year. The Chinese government is not expected to further commit to US assets until solid signs of economic recovery emerge, the same analyst suggests.
A second bond analyst also suggested that the Chinese central bank will hold back on investing in US Treasuries as the outcome of the rescue was still in doubt. He said the central bank may take a wait-and-see attitude before committing further investment.
However, Tom Byrne, senior vice-president at ratings agency MoodyÆs, says the US bond market is the most liquid market and he does not see the Chinese central bank looking elsewhere to invest its huge reserves. ôChina will continue to accumulate reserves rapidly. Where are they going to invest them?ö
Meanwhile, Calyon said in a research note today that the US governmentÆs rescue plan exposes the US Treasury to huge financial risk although, at the moment, the actual cash going into the two firms is small.
By effectively nationalising the companies (technically speaking it is not a nationalisation), treasury secretary Henry Paulson will be hoping to arrest the decline in the housing market and save the Treasury a much larger bailout bill. Strictly speaking each company has been given a $100 billion backstop liquidity facility. Dividend payments have been eliminated to current shareholders, but interest payments on debt will continue, the research note says.
Investors on the mainland showed no initial enthusiasm after the news from the US. Downbeat investor sentiment further weighed on the Chinese stockmarkets. For companies dually listed in Hong Kong and China, the average spread has narrowed from a peak of more than 100% at the start of the year to just 8% in recent weeks. Numerous "technical support levels" û perceived as important to market watchers û have been breached. A gloomy economic outlook has been blamed for the bearish performance of the Chinese stockmarkets this year.
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