As the FT notes today, it’s like a financial version of “The Blob” — every time you think the subprime monsters are receding, they just come back bigger and stronger. Case in point: despite China’s distance from the vortex of the credit crunch, it’s finding out it is hardly impervious today, as reports pile up that the country’s largest bank may face write-downs on U.S. mortgage securities dwarfing the amount it originally expected. A roundup on what’s happening and what might be just around the corner.

So China is now finding out, with the latest rumours that Bank of China — the country’s largest bank — is preparing a write-down on its investments in US mortgage securities six times larger than initially provisioned for.

Analysts estimate that the state-owned lender, traditionally the most international of the country’s big banks, may have to write off about $2bn - a quarter of the nearly $8bn it holds in securities backed by subprime mortgages, the WSJ reports.

While that still would leave the bank profitable for last year, it would be far larger than the $322m the lender said it had set aside for such losses when it announced third-quarter results, the last time it publicly addressed the matter.

Bloomberg, however, reports on Tuesday it might be even worse than that for BoC - possibly more than double the Journal’s estimate, according to a Monday note from BNP Paribas which warns that BoC may have to write down the value of overseas securities by Rmb35bn ($4.8bn).

BoC, whose shares were suspended from trading in Shanghai Tuesday pending an “important” announcement, dropped 9.2 percent to HK$3.06 in Hong Kong. Chinese bank shares have certainly been punished in Monday and Tuesday’s rout in Asian markets, but then, so have all China stocks. In Hong Kong on Tuesday, China plays, which dominated trade, plunged 12 per cent in their worst one-day percentage loss in 10 years as the benchmark Hang Seng Index plummeted 8.7 per cent to 21,757.63, the biggest one-day loss since September 2001, reports Reuters. As Paul Kedrosky notes on Infectious Greed: “Gosh, that squirrelly subprime stuff is just so darn hard to find, isn’t it fellas?”

More seriously, he says, the deeper issue — as the Journal points out - is the opacity of Chinese banks, which list shares for international investors in Hong Kong and domestically in Shanghai.

“No-one knows much about what they hold, even if most people feel confident that their direct subprime exposure is fairly low. That said, however, there are many other channels via which they could find themselves at the other end of the credit crunch - assurances, higher-than-expected prime, a China credit corollary, etc. - so let’s not start partying quite yet.”

As the Journal puts it: “Analysts can make only educated guesses at how much money BoC’s subprime investments lost last year because China’s rules don’t require it to disclose the total until April, when it announces full results for 2007. The same is true for other big Chinese lenders, including Industrial & Commercial Bank of China and China Construction Bank, although their total holdings of US mortgage securities are much smaller.”

Underlining these concerns, Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission, warned in a statement on the agency’s website that China’s banks will “see rising credit risks” as they face a host of economic uncertainties.

And joining in the hunt for China’s monsters, Reuters reports on Tuesday that Zhong Wei, a senior economist at Beijing Normal University, predicted in the official Financial News that China’s banks will suffer a rise in non-performing loans due to the US subprime crisis and domestic credit tightening, and that stock market volatility would increase:

“With the spreading of the US subprime crisis and a slew of tightening measures to stop economic overheating and rising inflation, the bad assets ratio in the banking industry and the risk of fluctuations in the capital markets is growing.” The non-performing loan ratio of major commercial lenders - the large state lenders plus 12 joint-stock banks - fell to 6.7% at the end of 2007, down from 7.5% at the end of 2006, according to Reuters.

But any moves to put the brakes on rampant property development, as part of efforts cool the economy, will probably put thousands of developers and construction firms out of business, resulting in more...

(Continue reading on The Financial Times)

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