Holy Crap on a (Chinese Made) Pogo Stick

(I for one welcome our new Chinese overlords! @11am – promoted by buhdydharma )

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I’ll be a monkey’s uncle.

In a diary on mortgages, now frontpaged, a comment was made about the Chinese moving in to your home when the proverbial shit hits the fan.

My initial reaction – that sounds just a tad farfetched to me. After all, China does own a lot of our government debt, but I seriously doubt they own much in the way of our personal debt.

Well, since Google is our friend, I decided I better test my theory before spouting off.

And thus, the title of this essay.

From an August article in the International Herald Tribune:

HONG KONG: The first purchase by the Chinese government’s new overseas investment fund, a $3 billion stake in the Blackstone Group, has backfired badly and produced an unusual public backlash within China.

Blackstone shares have fallen steeply since the company went public June 22, pushing down the value of the government’s investment by more than $500 million in just six weeks. Bloggers and even some Chinese financial media have frequently mentioned the dwindling value of the government’s stake, and some have been highly critical.

Blackstone is a company that invests in private equity funds, real estate opportunity funds, and other debt vehicles. It trades on the New York Stock Exchange.

More:

For many years, China’s central bank followed the example of most central banks by investing the bulk of its assets in Treasury bonds and other government bonds. But as China’s foreign reserves have soared to $1.3 trillion, the government has started chasing higher returns – and is now learning that this involves greater risk and sometimes losses.

Over the last several years, the People’s Bank of China has led the way among central banks in buying U.S. mortgage-backed securities, accumulating an estimated $100 billion worth of them, according to people with knowledge of the central bank’s trading. The People’s Bank of China has long chosen some of the most creditworthy tranches of these securities.

Pardon my French, but who the fuck is managing the store around here? Jeebus. Do we have no sense of balancing risk in this topsy turvy world? By we, I mean of course our Federal Government. We have become so enamored with our debt driven economy, we no longer give a rat’s ass who is holding the chips at the end of the day.

This is beyond ridiculous.

But with the malaise in the U.S. housing market, even the value of some previously creditworthy mortgage investments is starting to erode. The Chinese central bank abruptly halted purchases of U.S. mortgage-backed securities in May, although it does not appear to be liquidating existing holdings, said one person who follows the bank’s trading practices closely.

This person insisted on anonymity because of the central bank’s policy of banning transactions with any individual or institution that discloses information about it.

Nice. The balance of the article talks about how the foreign investments aren’t highly thought of back home, and how China restricts foreign ownership of their financial assets while at the same time advocating for fewer restrictions from the West. And of course, we are playing along.

These corporatist, free-trade with anything goes politicians have to go. All of ’em need to wake up and smell the coffee tea leaves.

So how are things since August? The above article suggests a slow down. Not so fast, friends… From an article last week in Bloomberg:

Oct. 17 (Bloomberg) — Industrial & Commercial Bank of China Ltd., the world’s largest bank by market value, will set up branches in cities including New York and Moscow and make acquisitions to speed up its overseas expansion.

…Chinese banks, flush with cash after raising $63 billion selling stock in the past two years, are seeking targets overseas as the U.S. subprime mortgage meltdown hurts financial stocks globally. China Citic Group yesterday said it may bid for part of Bear Stearns Cos., the Wall Street firm hit hardest by the collapse in U.S. mortgage-backed securities.

…China’s largest banks could take advantage of the falling stock prices of global peers that have suffered after investing in securities backed by mortgages to riskier borrowers. Wall Street’s biggest firms recorded a combined $3.8 billion in third-quarter losses. Shares of Bear Stearns, the fifth-largest U.S. securities firm, fell as much as 37 percent this year.

China’s own banks have so far been relatively unscathed by the subprime crisis. ICBC held $1.2 billion of securities linked to the riskier U.S. mortgages as of June 30 and China Construction Bank Corp. owned $1.06 billion. That compares with 300 billion yen ($2.6 billion) at Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank.

So now they are position to buy even more US debt instruments. Not just government debt. Personal debt. And lots of it.

I sit in stunned silence, not knowing what else to add.

(h/t to stonemason)