Font size: 
Yet the Dow Jones Index kept falling due to the effect of the loan crisis. So did the three largest European stock market indexes, Japan's leading economic index and the Hang Seng Index in Hong Kong. Within 48 hours, central banks around the world put in US$320 billion to help fight the fire -- the first large-scale international economic intervention since 9/11.
Subprime mortgage loans are those provided to people with low credit ratings to help them buy houses. Usually, these loans require no down payment but carry a high interest rate. The risk of non-payment is also high.
A few years ago Americans were generally optimistic about the real estate market. Housing prices were rising and interest rates were low. These three factors resulted in rapid expansion of the subprime mortgage market. According to U.S. government statistics, from 2003 to 2005 the proportion of subprime loans in the mortgage market increased from less than 10 percent to about 30 percent.
However, in the past year housing prices in the United States have gradually fallen, while interest rates kept rising, making it harder for borrowers to make their loan payments on time. Some lenders, investment banks and hedge funds lost huge amounts of money. Some went out of business. The U.S. Mortgage Bankers Association estimated that 30 percent of subprime borrowers were unable to make their payments on time in 2006.
Lenders such as the New Century Financial Corp. and the American Home Mortgage Investment Corp. went bankrupt. Top investment banks Citicorp, J.P. Morgan Chase, Bank of America, Deutsche Bank and Morgan Stanley also suffered great losses.
This crisis has affected international financial markets and even commodity markets. Starting in August global commodity markets began to fall, including metals, crude oil, agricultural products and others.
However, many analysts think the U.S. financial market is well developed and has the capacity to recover, and that the subprime mortgage loan crisis will not turn into a global financial crisis. Nevertheless, it has sounded the alarm bell for China.
A small number of Chinese commercial banks, such as the Bank of China and the Bank of Commerce and Industry, suffered some losses in this crisis, but the impact was not great. However, the crisis warns us that Chinese domestic enterprises must be very careful while entering high-risk businesses overseas. According to recent research by the U.S. Department of Finance, by the end of June last year, Chinese entities had bought US$107.5 billion of U.S. mortgage-backed securities, of which a large percent were subprime loans.
China has huge foreign exchange reserves, so it is easy for the country to be targeted by the subprime loan business, which can have high returns as well as high risks. Recently, senior officials of China's Central Bank and the Central Huijin Investment Company complained that purchasing U.S. subprime loans meant paying the bills for Americans with China's foreign exchange reserves and undertaking risks for Americans.
In reality, China also has considerable risks of its own in the mortgage market. At present, domestic housing prices are rocketing and profits from real estate sales are huge, which is a fatal enticement to commercial banks. Many large banks are trying to get a share of the housing loan market.
But unlike the United States, the personal credit system in China is not well developed, and the banks' ability to absorb risks is weak. In addition, all domestic property loans are provided by banks, and all loan risks are borne by banks. China hasn't established a subprime mortgage market, and there are no mortgage-backed securities either to spread the risk among a group of investors.
Under such circumstances, China's high-level officials should really pay attention to the risks inherent in the domestic mortgage business.
--
(Hu Xingdou is professor of economics and China issues at the Beijing Institute of Technology, and an expert on social problems. This article is translated and edited from the Chinese by UPI Asia Online. ©Copyright Hu Xingdou.)
