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China’s banking regulator has convened a task force to monitor US subprime exposure at Chinese banks as they prepare for larger-than-expected losses on those holdings, senior officials told the Financial Times on Tuesday.

The China Banking Regulatory Commission has established a special group to investigate the subprime holdings of China’s largest lenders and report on a monthly basis, according to officials who asked not to be named.

However, Chinese financial institutions remain relatively unscathed compared with their counterparts in Western markets.

A spokesman for Bank of China, the largest holder of US subprime securities in Asia, said the bank would take losses on more of those holdings than it had earlier predicted but would still record year-on-year profit growth for 2007.

BoC has not revealed the quality of its subprime holdings and independent estimates of its total losses vary widely but the most pessimistic analysts believe the bank will have to write down as much as $4.8bn, or more than 60 per cent, of its $7.95bn in subprime securities.

At the end of September BoC set aside $321m, or just 4 per cent of its subprime portfolio, to cover any losses

BoC has had at least one stormy meeting with PwC, its auditor, in the past month, in which the bank’s subprime exposure was the central issue, according to people familiar with the matter.

The two other Chinese banks with significant subprime holdings – Industrial and Commercial Bank of China and China Construction Bank – reported total exposure of $1.23bn and $1.06bn respectively late last year. Analysts say they will probably have to make provisions for between 30 per cent and 40 per cent of those, a similar ratio to Citigroup.

But that is a comparatively small amount for the country’s largest financial institutions and analysts say even BoC is likely to come out of the credit crisis relatively unharmed.

“Even if BoC had to write down its entire subprime portfolio it would only mean one year’s lost profit,” according to Bill Stacey, director of equity research at Credit Suisse in Hong Kong.

“And, unlike financial institutions in the US, Chinese banks didn’t rely on selling these products for any of their income.”

Chinese banks are known to have been more conservative in their subprime-related investments than many Western financial institutions and, although they have not fully disclosed the quality of their holdings, the majority is thought to be rated at the top end of the scale.

Chinese financial institutions do not have the same problems accessing credit that their developed market counterparts are facing as a result of the subprime crisis.

Instead the Chinese government is raising interest rates and issuing administrative orders to banks to rein in credit growth because of fears that consumer inflation, which has reached an 11-year high, could get out of hand.

PwC, CCB and ICBC declined to comment.

Copyright The Financial Times Limited 2017. All rights reserved.
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