Chinese Express Wary Faith in Fannie, Freddie Debt

By AARON BACK

BEIJING—China's government, one of the biggest holders of debt from Fannie Mae and Freddie Mac, voiced confidence that Washington would continue to stand behind the obligations of the U.S. mortgage giants after the Obama administration outlined options for phasing them out.‬

The statement by the State Administration of Foreign Exchange, or SAFE, the arm of China's central bank that manages foreign-exchange reserves, reflects Beijing's continued concern about perceptions within China of the safety of its U.S. investments. Most of China's $2.85 trillion in reserves is invested in dollar assets, and while China doesn't disclose the size of its holdings of Fannie and Freddie securities, past records show it owning hundreds of billions of dollars of debt from them and other U.S. government-linked agencies.‬

Chinese officials have raised concerns about the possible impact of U.S. policy on the future value of China's dollar holdings, saying loose monetary policy could hurt the value of U.S. assets. But the government has also rejected rumors that it has lost money on its existing holdings of Fannie and Freddie debt.‬

The Obama administration on Friday issued a white paper on plans to reduce U.S. government involvement in the mortgage market, including an eventual phaseout of Fannie and Freddie, which the government took over in 2008. But the White House's report emphasized that it "will not waver from its commitment" to ensuring that the two "have sufficient capital to honor any guarantees issued now or in the future and meet any of their debt obligations."‬

SAFE's statement, posted on its website Saturday, said the White House plan "has aroused widespread public interest and concern that our foreign-exchange reserve investments could be damaged." The statement said China has not had losses on its Fannie and Freddie holdings, and added that SAFE "took particular notice that the U.S. government's commitment to support [Fannie and Freddie] hasn't changed."‬

China. U.S Treasury data show that as of June 2009 China held $454 billion of long-term U.S. agency debt, the bulk believed to be Fannie and Freddie debt. More recent figures on its holdings haven't been published‬.

But separate Treasury data show China has been steadily selling its holdings of agency securities since mid-2008, including net reductions of $24.67 billion in 2009 and $27.35 billion in the first 11 months of 2010. Those figures don't include transactions through intermediaries in other countries, however.‬

Public concern in China about possible losses on its U.S. investments has flared up repeatedly in China since the start of the global financial crisis. Many Chinese seem to believe that during the crisis the country lost vast sums on its U.S. holdings.‬

Last week, Lu Zhengwei, a senior economist at Industrial Bank Co., a small Chinese lender, said in a report that the commitment by the Obama administration to pay back holders of Fannie and Freddie securities amounts to an "empty check" without the support of the U.S. Congress. "Looking at the current political situation in the U.S., for the U.S. Congress to give a clear guarantee on this issue is almost impossible," Mr. Lu said.‬

The same day, a separate report in the Chinese newspaper International Finance News cited unnamed analysts as saying that losses on China's Fannie and Freddie holdings could reach $450 billion. The report provided few details on its calculations.‬

SAFE responded with a statement on Friday denouncing such estimates as "groundless," and strongly denying that it faces any losses. The denial was given prominent treatment by state media Friday evening, including during the widely watched evening news broadcast on state television.

Last year, outlandish rumors spread that the central-bank governor, Zhou Xiaochuan, had defected to the U.S. because of hundreds of billions of dollars in purported losses on U.S. debt—even though U.S. Treasurys were in fact one of the best-performing assets at the time.‬

In late 2008, a lengthy Chinese-language essay circulated online excoriating Mr. Zhou and other top officials for being too close to the U.S., accusing them of having "colluded" with then Treasury Secretary Henry Paulson to buy U.S. bonds.‬