Asian Stocks Soar on Fannie, Freddie News

(page 2 of 2)

Chinese Markets Defy Trend

Instead, the bailout should provide more security for Asian central bankers, sovereign wealth fund managers, and other investors in U.S. government paper, says Elena Okorotchenko, an analyst in Singapore with Standard & Poor's (like BusinessWeek, a unit of The McGraw-Hill Companies [MHP]). American policymakers "are not going to allow a systematic crisis," she says, and that means Asians are unlikely to change their investment strategies. "As long as they invest in highly rated instruments, there is no concern," says Okorotchenko. "The government of the U.S. has signaled that it stands very strongly behind both Freddie and Fannie."

Still, for all the relief in most Asian markets, there was little joy in China on the news of the Fannie Freddie bailouts. China has some $300 billion invested in Fannie and Freddie paper, but news of the rescue plan did little to help local shares. The Chinese markets defied the regional trend, with both Shanghai and Shenzhen markets dropping (Shanghai down 2.7% and the smaller Shenzhen market off 4.1%). The falls were driven in part by local concerns amid worries about the Chinese property market.

Beijing's bankers are not going to find much solace in Paulson's move, argues Andy Xie, a former Morgan Stanley (MS) economist who now is an independent economist and newspaper columnist in Shanghai. The Fannie and Freddie crisis "has been a nightmare for the Chinese leadership," he says. With all of China's financial institutions exposed to the U.S. companies, "China is effectively a hostage in this situation," he says. While the new plan will "kind of revive the market," adds Xie, the Chinese are still trying to answer the bigger question. "The issue is, can China get out?" he asks. "China is so big in the market, if China gets out then the market will crash."

Xie is also less confident Chinese bankers will be willing to invest in the U.S. as much as they have in the past. Of China's $2 trillion in foreign reserves, two-thirds are in U.S. treasuries or agency paper, he says. "This for China has been a near-death experience," he says. "In the future, Chinese leaders will be very cautious about buying U.S. paper. This will lead to a wholesale change in the direction of managing China's wealth."

Einhorn is Asia regional editor in BusinessWeek's Hong Kong bureau. Moon is BusinessWeek's Seoul bureau chief. Tashiro is a correspondent for BusinessWeek based in Tokyo.