VZCZCXRO9006
RR RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3501/01 2532311
ZNR UUUUU ZZH
R 092311Z SEP 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 9814
INFO RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 02 BEIJING 003501 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN CH
SUBJECT: Positive Chinese Reaction to Fannie Mae and 
Freddie Mac Action 
 
REF: Hong Kong 1679 
 
AmConsulate Shanghai contributed to this report. 
 
¶1. (SBU) Summary: Chinese official and private 
reaction to news that the United States Government 
would place housing mortgage agencies Freddie Mac and 
Fannie Mae under conservatorship was generally 
positive.  Vice Premier Wang Qishan appreciated the 
effort.  Finance Assistant Minister Zhu Guangyao hoped 
to minimize the political cost to the Chinese 
government of the crisis.  Stock market and business 
commentators also generally endorsed the move, while 
noting that most Chinese commercial entities are not 
overly exposed to Fannie and Freddie debt.  End 
summary. 
 
Official Central Bank Reaction 
------------------------------ 
 
¶2. (U) The Chinese Central bank spokesperson today 
made a statement commenting on the U.S. government 
takeover of Freddie Mac and Fannie Mae.  He said that 
"the People's Bank of China believes that these measures 
are positive and will stabilize the market and boost 
confidence."  He added that "the U.S. government should 
conscientiously take responsibility for maintaining the 
stability of the global financial market and protecting the 
interests of investors." 
 
Vice Premier Wang Qishan 
------------------------ 
 
¶3. (SBU) In a phone call with U.S. Treasury Secretary Henry 
Paulson, Vice Premier Wang Qishan said he appreciated the 
effort to protect both creditors and taxpayers.  If 
creditors are not protected, he said, the international 
financial system would be adversely affected.  Given that 
U.S. agency debt accounts for a large share of Chinese 
reserves, USG policies towards this debt greatly impacts 
China.  He said he needs time to study the action and 
market reaction, and then will provide a response. 
 
¶4. (SBU) Wang thought that 75 percent of GSE debt was held 
by U.S. investors.  While China is the largest foreign 
investor, it only accounts for one-third of foreign-held 
agency debt.  Wang stated that U.S., not Chinese, 
investors' reaction was critical.  He said that if U.S. 
market confidence is not restored, it will be difficult for 
China to maintain confidence in this debt. 
 
¶5. (SBU) Wang noted that the Chinese government does not 
want the U.S. economy to experience major problems.  U.S.- 
China economic cooperation is strong.  The USG policies on 
agency debt were a test of whether investors would be 
protected. 
 
MOF Assistant Minister 
---------------------- 
 
¶6. (SBU) Assistant Finance Minister Zhu Guangyao said that 
orderly and deft management of this problem is in China's 
interest.  Zhu said that China holds USD400 billion in 
Freddie and Fannie assets.  (Note:  This is most likely is 
based on June 2007 Treasury data, which reports Chinese 
holdings at $376 billion.  Actual holding are most likely 
higher because this does not include holdings in third 
country funds in which Chinese entities have invested, and 
Chinese overseas assets increased by USD 476 billion 
between June 2007 and June 2008.) Because the government 
faces a public opinion backlash associated with a loss in 
the RMB value of its foreign assets (both due to 
appreciation of the RMB and declines in the market value of 
its holdings) China wants to minimize the political costs 
of this crisis, said Zhu. 
 
¶7. (SBU) Zhu noted that the United States had been telling 
the Chinese government for weeks that the tools provided by 
Congress were sufficient to handle the situation at Fannie 
Mae and Freddie Mac.  He questioned why the USG had now 
turned to a conservatorship. 
 
Market Reaction 
--------------- 
 
¶8. (SBU) Shanghai Stock Exchange Deputy Director of Global 
Business Development Chao Kejian said that the takeover of 
Fannie/Freddie was very good news for China.  China's 
banking sector stocks showed comparatively stable prices in 
wake of this news, even in the face of overall economic and 
 
BEIJING 00003501  002 OF 002 
 
 
property sector weakness. 
 
¶9. (SBU) Chao speculated that the Central Government was 
slightly more likely to take measures to support China's 
stock market in the wake of the USG's action, but any such 
move would await a decision by Vice Premier Wang 
Qishan.  The Central Government on balance is still very 
cautious about taking measures to support China's stock 
market. 
 
Business Reaction 
----------------- 
 
¶10. (U) Spokesman for the Bank of China Wang Zhaowen said 
"we think it's a very positive move by the United States 
government.  It has come from being an invisible regulator 
to the front lines to save the market." 
 
¶11. (SBU) Haitong Securities Macro Analyst Wu Yiping felt 
the U.S. government action would have little direct impact 
on the Chinese financial industry.  Wu claimed that the 
banking sector has the largest exposure to Fannie and 
Freddie debt, although insurance companies such as Pingan 
and China Life Insurance might also hold some debt.  She 
said Chinese investors saw the USG move as a positive 
signal for the global financial market. 
 
¶12. (SBU) Bank of Communication Manager Chiu Gaoqing 
claimed that, although BoCOM had sold its Fannie and 
Freddie investments, and thus was not directly affected by 
the takeover, the move might bring some stability to global 
financial markets. 
 
Commercial Exposure 
------------------- 
 
¶13. (U) China Business News reports that, according to the 
latest survey by the China Banking Regulatory Commission 
(CBRC), at the end of June 14 banks held Fannie and Freddie 
debt valued at around USD31 billion, with the six listed 
commercial banks holding over USD25 billion in debt.  The 
Bank of China was the largest investor, with USD17.3 
billion in debt. 
 
¶14. (U) In the last month, all of the listed banks have 
announced that they are drawing down their Fannie and 
Freddie debt.  Bank of China's Fannie and Freddie exposure 
decreased by around USD7.14 billion. 
 
Comment 
------- 
 
¶15. (SBU) The Chinese government's foreign exchange 
managers have recently received a fair amount of public 
criticism for taking large losses on Chinese foreign assets 
due to the appreciation of the RMB.  The somewhat defensive 
call from the PBOC for the United States to "protect 
investors' interests" appears to reflect these attacks. 
While financial officials tend to acknowledge that Chinese 
international reserve holdings are too large for them to 
meaningfully adjust asset allocations without having 
significant and adverse market impacts on their holdings, 
this is not generally understood by senior officials and 
the general public.  Government interlocutors have 
consistently stressed that, given the role of the US dollar 
as a reserve currency, the U.S. government has a 
responsibility to take into account any impact on the 
international financial system when addressing problems in 
government-sponsored enterprises.  Thus, government finance 
officials seem genuinely appreciative that the U.S. 
government has acted to safeguard the interests of holders 
of Freddie and Fannie debt. 
 
¶16. (SBU) Most Chinese commercial entities beyond the 
largest state-owned banks are not very exposed to U.S. 
agency debt.  They nevertheless welcomed the USG move to 
stabilize international financial markets, given concerns 
that financial stress could further weaken the growth of 
U.S. domestic demand and Chinese exports. 
 
RANDT