We all know that China has accumulated a staggering $US1.3 trillion in foreign reserves over the past few years, but it’s only starting to now dawn on analysts that the one-party totalitarian state might in fact be the biggest loser from the collapsing US sub-prime mortgage market.

The AFR published this New York Times article on Saturday which included the following:

“Over several years, the People’s Bank of China has led the way among central banks in buying US mortgage-backed securities, accumulating an estimated $US100 billion of them, according to people familiar with its trading.”

NAB chief executive John Stewart gave an excellent summary of the US sub-prime market to Alan Kohler on Inside Business yesterday, including the following:

“It’s about 15 per cent of the mortgage market in the US. To give you an idea that is about $1.3 trillion. Right now about 20 per cent of it is in arrears. Now what causes the arrears, a thing called an ARM which is an automatic reset mortgage. So a person starts at say 3 per cent on their mortgage and after a year or two, whatever is in the terms of the mortgage, it resets to up to say 6.5 or 7. The thing there, Alan, is that there are $450 billion of those mortgages that are going to get their first reset in the next 12 months. So this problem isn’t over.”

Okay, so the Chinese government have invested $US100 billion – eight per cent of their reserves – into the $8.16 trillion US mortgage market, but we don’t know how much of that has gone into the $US1.3 trillion sub-prime component.

One of the big arguments used to play down the sub-prime crisis is that, Bear Stearns aside, we’re yet to see a major American financial institution such as a big bank confess to any meaningful pain.

This appears to be because it is investors such as Australian councils, Macquarie Fortress and hundreds of pensions schemes across the globe that are taking the hit. Given that the Chinese have accumulated the biggest cash pile in history, it stands to reason that they are the biggest losers – especially if they really have pumped $US100 billion into it.

The Chinese have even take a hit on their 10% stake in private equity firm Blackstone which was priced at $US31 in the June float but is now down to $US24.39. Punters contributed $4.13 billion and the Chinese Government stumped up an additional $US3 billion but their stock doesn’t even get a vote, as you can see here.

Our Future Fund has only $40 billion of cash to play with but the Chinese are showing them how it’s not done.

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