China experiences subprime setback

August 25, 2007|By New York Times News Service

BEIJING -- After appearing immune to the turmoil engulfing the mortgage market in the United States, China suffered its first serious setback yesterday from exposure to subprime loans.

Investors punished China's flagship lender, Bank of China, after it disclosed the biggest exposure so far of any bank in Asia. Shares in the bank, the second largest in China, fell 5.4 percent in Hong Kong a day after it reported holding almost $9.7 billion in securities backed by subprime mortgages. That is about 3.5 percent of its total securities portfolio.

Industrial and Commercial Bank of China, the biggest Chinese lender, also suffered at the hands of investors yesterday after it disclosed that it was holding $1.23 billion in securities backed by these mortgages. Its shares fell 2.4 percent before ending up 0.2 percent.

The potential for losses on these investments is a blow to the two state-controlled lenders, which have been at the forefront of China's efforts to clean up its vast, inefficient banking system and halt the accumulation of bad loans.

China has spent more than $280 billion since 1998 to clear bad loans from the books of its state-controlled banks and prepare them for competition from foreign banks that are beginning to expand their operations in mainland cities.

Banking experts remain confident that any losses arising from subprime loans suffered by Bank of China, the Chinese bank with the biggest exposure to foreign markets, were unlikely to seriously jeopardize its financial performance.

"We expect the losses are not going to be unbearable," said Charlene Chu, a banking analyst with Fitch Ratings in Beijing. "They should be able to absorb them pretty easily."

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