The Future of Fannie and Freddie Mac will Impact China

China may be affected by the imminent changes to Fannie and Freddie Mac announced by the Obama administration. Chinese regulators have issued a rare denial of a local media report that the country could lose up to $450 billion on its investment in securities issued by U.S. housing giants Fannie Mae and Freddie Mac. Many Chinese are convinced that China lost vast sums of money on its investments in U.S. assets during the financial crisis. Last year, for instance, rumors spread that the central bank governor, Zhou Xiaochuan, had defected to the U.S. because the People’s Bank of China had somehow, quite implausibly, lost $430 billion on its investments in U.S. Treasury bonds.

China has never disclosed the size of its holdings of Fannie and Freddie securities, but according to the U.S Treasury’s report on foreign holdings of U.S. securities, China held $454 billion of long-term U.S. agency debt as of June 30, 2009. That includes $358 billion of “asset backed securities…backed primarily by home mortgages,” and $96 billion of other long-term agency debt. The bulk of those holdings are likely in Fannie and Freddie bonds and securities, though it also includes debt from other U.S. government agencies such as the Government National Mortgage Association.

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