Editor's Note: With the deepening of Chinas reform and opening, foreign exchange is becoming more closely related to the interests of the public. The State Administration of Foreign Exchange (SAFE) proposed that continual efforts should be made to disseminate knowledge about foreign exchange administration and to interpret relevant policies so the public will better understand Chinas foreign exchange administration. In July 2010, the SAFE compiled Q&As about hot issues regarding investment in the U.S.-based Fannie Mae and Freddie Mac that received wide and enthusiastic support from the public.
On February 11, 2011, the Treasury Department and the U.S. Housing and Urban Development Department issued a white paper on the reform of Fannie Mae and Freddie Mac, which aroused widespread concern that Chinas foreign exchange reserve investments in the two GSEs may be affected. We responded to this concern and have found that so far no losses have been incurred in Chinas bond investments in the above two companies. To allow readers to better understand the latest developments, we once again have compiled Q&As about related issues for your reference.
Q1: Why did the United States issue the white paper on the reform of Fannie Mae and Freddie Mac at this time?
A: Since the outbreak of the financial crisis there have been appeals and disputes over the reform of Fannie Mae and Freddie Mac. The Congressional Dodd-Frank Reform Bill, enacted in July 2010, mandated that the government submit a proposal on the reform of Fannie Mae and Freddie Mac. In 2010 the U.S. Treasury Department held a seminar on the reform of housing financing, proposing that the government submit a preliminary reform plan to the Congress in early 2011. The issuance of the white paper is in accordance with this plan.
Q2. Are there any new ideas proposed in the white paper about the orientation of the reform?
A: We noticed in the white paper that the reform of the U.S. housing financial market is primarily targeted at changing the role of the government in regulating the market. The white paper proposes that the government confine its responsibilities to such areas as strengthening its regulatory efforts, protecting the interests of consumers, giving special support to middle- and low-income homeowners and tenants, maintaining market stability, and combating the financial crisis. The U.S. government will gradually exit from the housing financial market and will endeavor to create conditions for private capital to play a dominant role. In particular, we noted that there are no changes with regard to the U.S. government commitment to support the two GSEs, which means that the government will guarantee that the two GSEs will have sufficient capital to exit from the market. The reform plan primarily proposes that the government will bring into play the functions of the private sector to bolster the housing financial market, maintain the equity and effectiveness of the housing market, and build up a well-organized system for supporting housing loans and promoting the reform in a responsible and prudent manner. The reform relates directly to whittling away the functions of the two GSEs in the housing financial market and proposes three alternatives to the current model of housing financing for the two GSEs. It will take quite a long time from the issuance of the white paper to implementation, which will entail a series of procedures set forth by the U.S Congress and the U.S. government. It is for this reason that thus far no detailed timetable for the reform has been worked out by the government. Analysis indicates that implementation may begin after 2012 provided that everything proceeds smoothly.
Q3: What was the response of the financial market after issuance of the white paper?
A: As of February 11, the financial market actively responded to the issuance of the white paper. By the time of closing in New York, there was a widespread increase in the price of bonds issued by the two GSEs. The increase surpassed that of Treasuries, with the highest reaching up to 0.5%.
Q4: There are some concerns that after issuance of the white paper Chinas bond investments in the two GSEs with its foreign exchange reserves will suffer losses. What do you think about the security of these investments?
A: As government-sponsored enterprises incorporated by congressional legislation, Fannie Mae and Freddie Mac have always been the principal instruments of U.S. housing financial policies. Even after being taken over by the U.S. government due to the financial crisis, the two companies have remained the primary channels of Americas housing financing, through which the overwhelming bulk of newly-supplemented mortgage loans are provided. In addition to its position as a colossal investor injecting hundreds of billions of dollars into the two GSEs, the U.S. government is also the largest holder of bonds issued by the two companies, with total bond investment topping USD1.6 trillion. In view of the crucial role of Fannie Mae and Freddie Mac in bolstering the American housing market, accelerating the economic restoration, and maintaining financial stability, the white paper underscores that prudential measures will be taken in the reform to ensure the capital sufficiency of the two GSEs to completely fulfill their guaranty obligations and debt repayments. The government will not pursue any policies or measures that may impair the capability of the two companies to carry out their obligations. In determining a timetable for the reform, the U.S. government will take into account many factors, such as the process of economic restoration and the conditions in the financial market.
As for China, our country has always complied with the principle of security, liquidity, value maintenance, and appreciationin handling its foreign exchange reserves. Prudent efforts have been made to implement multiple investment strategies as a way to guard against potential risks. As a result, the main potential risks to the bond investments in the two GSEs have been effectively defused.
