China Unlikely to Buy Any More MBS's

[TJ_98370]

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This development should rock the U.S. mortgage lending industry. Hasn't China been buying alot of U.S. debt? Several fellow Seattle Bubbleheads (and I wear that moniker proudly) have been anticipating this event -



While China is eager to invest a portion of its US$1.33 trillion foreign-exchange reserve overseas, it is unlikely to take a chance on buying additional US mortgage-backed securities (MBS) as they are now considered too risky, Chinese economists said.

During a recent trip to Beijing, US Department of Housing and Urban Development (HUD) Secretary Alphonso Jackson tried to sell China on the idea of buying more MBS. Investing in MBS offers better returns for China than US Treasury bonds, and at the same level of risk, Jackson claimed.

He called it a "win-win" situation in a statement released prior to his Beijing trip. "China has bought some mortgage-backed securities from us, but not in great numbers," Jackson said.....

....Yi Xianrong, a senior economist and finance professor with the Chinese Academy of Social Sciences, a central government think-tank, attributed the previous surge of mortgage-backed securities bought by Chinese companies to inexperience in conducting risk assessments and their miscalculation of the US property market....

I'm shocked that Mr. Xianrong feels that the risk of MBS's were misrepresented. Perhaps he just isn't "sophisticated".

....Yi said some bond ratings agencies that advise investors, including Chinese, also purposely played down the MBS risk. "Some ratings agencies slapped investment-grade ratings on mortgage-backed bonds that they knew they were risky," he charged.

Bond-rating agencies this month finally downgraded about $12 billion worth of subprime US mortgage securities, Yi said.

Economist Shi Weigan echoed Yi's comments. "With a possible burst in the housing bubble in the US, it's not the right choice for Beijing to spend foreign-exchange reserve funds on the US mortgage-backed securities," Shi said.
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