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And maybe the U.S. will buy some Chinese railroad bonds

Section: Daily Dispatches

U.S. Urges China to Buy
Mortgage-Backed Securities

By Josephine Lau
Bloomberg News Service
Friday, July 13, 2007

BEIJING -- The Bush administration is urging China's central bank to buy more government-backed mortgage bonds in an effort to sustain financing for U.S. home loans.

U.S. Department of Housing and Urban Development Secretary Alphonso Jackson is in Beijing to persuade the Chinese central bank to buy more securities from Ginnie Mae, a corporation under HUD that guarantees $417 billion in federally insured, fixed-rate mortgages.

"It's not a matter of whether they're going to do more business in mortgage-backed securities," Jackson told reporters in Beijing. "It's whom they're going to do business with."

HUD aims to tap China's $1.33 trillion of foreign-currency reserves, the world's largest, after surging defaults on subprime mortgages caused the near-collapse last month of two hedge funds run by Bear Stearns Cos.

Moody's Investors Service on July 10 cut its ratings on $5.2 billion of bonds backed by subprime mortgages, which are loans taken by borrowers with poor or limited credit histories. Standard & Poor's yesterday downgraded $6.39 billion of such bonds. Fitch Ratings said it may lower ratings on $7.1 billion.

Ginnie Mae is "in a better position than most" to offer mortgage products because, unlike Fannie Mae and Freddie Mac, it provides the full backing of the U.S. government, Jackson said. Mortgage securities offer China's central bank better returns than U.S. Treasury bonds at the same level of credit risk, he said. China held $414 billion in U.S. Treasuries as of April, according to data compiled by Bloomberg.

Jackson met with central bank Governor Zhou Xiaochuan and Minister of Construction Wang Guangtao in the nation's capital this week. Central bank spokesman Li Chao couldn't be reached for comment.

China has approved the creation of a new agency that will manage about $200 billion of its foreign exchange reserves, as the government seeks to boost returns from its holdings.

The nation held $107.5 billion in U.S. mortgage-backed securities as of June 2006, up from $3 billion three years earlier, according to HUD's Web site. The figures include securities offered by Ginnie Mae, Fannie Mae and Freddie Mac, HUD said, without detailing the holdings in each agency.

"China has bought some mortgage-backed securities from us, but not in great numbers," Jackson said, without providing a target for future purchases.

HUD also plans to approach Chinese commercial banks such as China Construction Bank Corp. and ask them to buy government- backed mortgage securities, Jackson said.

The housing department wants to sign a memorandum of understanding with construction minister Wang when he visits the U.S. in August, Jackson said without elaborating. The two nations face similar challenges in providing affordable housing to average citizens, he said.

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