China Seen Expanding Mortgage Bonds to Revive Housing

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China's Property Market
Commercial and residential buildings stand in Beijing. In 2011, Chinese banks began to curb home lending to prevent a real estate bubble from bursting. Photographer: Tomohiro Ohsumi/Bloomberg

China is poised to expand mortgage bonds to lift its slumping real estate market that accounts for a third of the economy.

Officials will likely allow banks to sell commercial mortgage-backed notes for the first time by the end of the year after reviving securities tied to home loans in 2014, according to China Merchants Securities Co. and China Chengxin International Credit Rating Co. The offerings, which help banks boost mortgage lending by freeing space on balance sheets, will grow “substantially” this year, China Credit Rating Co. said.

The government of Premier Li Keqiang eased home-purchase rules after new housing prices slid in many cities across China in February. Authorities, who halted securitization in 2009 after subprime mortgage bonds triggered the global financial crisis, are returning to such offerings to spur an economy growing at the slowest pace since 1990.

“The launch of commercial mortgage-backed securities may send a strong policy signal because it will give banks more space to lend money directly to property developers,” said Zuo Fei, a Shenzhen-based director of structured finance at China Merchants Securities, underwriter of the first RMBS deal this year. “The regulators are trying to improve property purchases in a gradual and an appropriate way.”

The People’s Bank of China on March 30 cut the required down payment for some second homes to 40 percent from 60 percent and has reduced benchmark interest rates twice since November. The central bank and the China Banking Regulatory Commission said on Sept. 30 that they will encourage lenders to issue mortgage-backed securities.

Unprecedented Borrowing

The government is trying balance efforts to provide new financing with steps to rein in unprecedented borrowing. Real estate companies sold a record $44.4 billion-equivalent of bonds in 2014, data compiled by Bloomberg show. In the latest sign of industry stress, Kaisa Group Holdings Ltd., based in the southern city of Shenzhen, is seeking a restructuring that would impose noteholder losses, fueling speculation that builder defaults may spread.

In 2011, Chinese banks began to curb home lending to prevent a real estate bubble from bursting. Lenders originated 494.2 billion yuan ($79.7 billion) in new property loans in the first two months of this year, 0.6 percent higher than the same period in 2014, the statistics bureau said on March 11. That compares with 27 percent annual growth for all bank lending.

Transferring Risk

“As the property bubble ballooned, Chinese banks have curbed real estate lending,” said Zhang Yingjie, Beijing-based deputy general manager in the research department of China Chengxin International, Moody’s Investors Service’s local joint venture. “Selling mortgage-backed securities can help banks transfer the risk of the loans to buyers of the products.”

The lending restrictions have pushed down housing prices in many parts of China. New-home values fell in 66 of the 70 cities tracked by the government in February from a month earlier. In January, prices dropped in 64 cities.

Last year, China’s bond regulators began taking steps to avert the coming real estate slump. In April 2014 they resumed sales of regular yuan notes by developers for the first time in five years. Property companies have sold 46.15 billion yuan of bonds this year, according to Bloomberg data.

“The regulators are mainly improving demand from first-time home buyers or people buying a bigger home to lift living standards, instead of pursuing large-scale stimulus policies as they did in 2008,” said China Merchants’ Zuo. “They’re trying to prevent sharp moves in the market, while at the same time they’re also easing policy as the economy is sluggish.”

CMBS Launch

Postal Savings Bank of China Co. and China Merchants Bank Co. have begun sales of notes backed by residential mortgages. Since July, they have issued a total of 9.96 billion yuan of these securities.

The introduction of commercial mortgage-backed securities, which are backed by loans to property developers, may help improve investor demand because their yields are generally higher than RMBS, according to Zuo.

“We worked out a CMBS plan with a bank last year, but held it off because of the government’s cautious attitude,” said Zuo. “We will actively follow any possible policy signal from the regulators to launch the product.”

China Merchants Bank on March 6 sold an AA- rated tranche of residential mortgage-backed securities maturing in November 2021 at a yield of 5.3 percent. That compares with the average 6.2 percent for similar-rated six-year corporate bonds in the secondary market.

‘Improving Knowledge’

“Interest rates on residential property loans are lower than those on corporate lending, so RMBS yields are not high enough to attract investors,” said China Chengxin International’s Zhang. “RMBS terms are long, and only insurance companies and social security funds would be interested in such long-term products.”

China may announce some measures to help attract RMBS investors and boost issuance, said Jerome Cheng, analyst at Moody’s in Hong Kong. RMBS offerings this year may be as much as four times last year’s level, he said.

The central bank on April 3 relaxed rules for the sale of asset-backed securities, making it easier for banks to transform some outstanding loans into tradable notes. Institutions no longer need to seek approval from regulators for each ABS sale, the central bank said.

Greenland Holding Group Co., a Shanghai-based developer, sold 200 million yuan of asset-backed securities tied to a shantytown renovation project on April 13. The notes were offered in cooperation with the finance arm of Alibaba Group Holding Ltd., led by billionaire founder Jack Ma.

“The market’s improving knowledge of the products and the regulators’ support will help spur a substantial increase in mortgage-back security sales in 2015,” said Zu Xin, an analyst at China Credit Rating, which graded the RMBS issued by China Merchants Bank in February.

— With assistance by Judy Chen

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