The impact of subprime mortgage financial crisis

The subprime mortgage financial crisis firstly started in the subprime mortgage market in the United States then became a global financial crisis in July 2007, and still has a strong impact globally.

Charles Prince, the Citigroup chief, quit for masses of losses during the subprime mortgage crisis. Citigroup announced that the losses was up to 11 billion dollars – much higher than the 2.2 billion reported in September. Merrill Lynch reported 8 billion of losses in October and then O’Neal resigned. British banks such as Barclays and Royal Bank of Scotland also faced the situation that their stock had shed around 3.0 percent in value. In Tokyo, the stock value of Mitsubishi UFJ Financial, Sumitomo Financial and Mizuho Financial fell similarly.

According to the United States Treasury data, till June 2006, investment on the real estate mortgage securities in America made by China’s financial institutions has summed up to 107.5 billion dollars. It is supposed that the subprime mortgage crisis will result in direct losses of 4.9 billion yuan for six listed banks in China.

In recent months, Chinese mainland media has published a lot of articles with the view that: the subprime mortgage crisis in US will not occur in China. The reasons are in the following:

Firstly, China’s mortgage business is at the initial stage, and it only accounts for relatively low in the business of commercial banks at present. As a result, in spite of several risk loans, the overall impact on the banking area will not be great.

Secondly, currently there is no securitization of individual housing loan in China. Therefore, it is thought that the scope affected by the subprime crisis in rather limited even if there are risks.

Thirdly, income level in China mainland has been high in recent years. According to China National Bureau of Statistics data, in the first half year, the income of urban residents increased by 14.2%, and the income of farmers went up by 13.3%.

Finally, the links between China and the global economy is not really strong. For example, Shanghai stock market is completely separated from the stock market in Wall Street. Furthermore, the National Bureau of Statistics has announced China’s property prices rose 8.2% in the third quarter 2007.