China’s First Mortgage Debt Since Crisis Shows Li Concern

China will revive mortgage-backed debt sales this week after a six-year hiatus, as the government extends help to homebuyers in a flagging property market.

Postal Savings Bank of China Co., which has 39,000 branches in the country, plans to sell 6.8 billion yuan ($1.1 billion) of the notes backed by residential mortgages tomorrow, according to a July 15 statement on the website of Chinabond. The last such security in the nation was sold by China Construction Bank Co. in 2007, Bloomberg-compiled data show.

Premier Li Keqiang is seeking to avert a collapse of the real-estate market after data last week showed new home prices dropped in a record number of cities in the world’s second-largest economy. The central bank in May called on the nation’s biggest lenders to accelerate the granting of mortgages to first-home buyers, and cities including Nanning, Hohhot and Jinan eased property restrictions.

“The government has eased its attitude toward the property market since property demand plunged this year,” said Wang Ying, an analyst in Shanghai at Fitch Ratings Ltd. “The policy measures it has taken this year have conveyed a message that property curbs will not be as strong as before.”

Prices Fall

Selling mortgage-backed securities can help banks free up space on their balance sheets for more lending by transferring the risk of the loans to buyers of the products. Authorities are allowing the revival of such offerings after housing prices fell in 55 of the 70 cities last month from May, the National Bureau of Statistics said on July 18, the most since January 2011 when the government changed the way it compiles the statistics. New mortgages in Shanghai, China’s financial center, declined 2.2 percent in the first half, according to a statement posted on the central bank’s Shanghai head office website last week.

The pressure on Chinese developers was underscored by the collapse in March of Zhejiang Xingrun Real Estate Co., a builder south of Shanghai. Developers, including China Vanke Co. and Greentown China Holdings Ltd., have cut property prices since March to boost sales. The slump comes as economic growth is set to cool to 7.4 percent this year, the slowest in more than two decades, according to the median estimate of economists surveyed by Bloomberg.

“The economy’s slowdown and the property market’s weakness are quite obvious in the first half,” said Fitch’s Wang. “Many developers’ first-half sales account for only less than 50 percent of their annual targets while they used to achieve more than 50 percent of the targets in previous years.”

Supplemental Measure

The northern city of Hohhot responded by waiving checks limiting the number of properties each resident is allowed to own, according to a statement on the local housing authority’s website on June 27. The eastern Chinese city of Jinan canceled purchase limits from July 10, the official Xinhua News Agency reported on its official microblog earlier this month, citing the local property management bureau.

Residential mortgage-backed debt is one of the supplemental measures the government can use to help avert a plunge in the property market, according to Frank Chen, Shanghai-based head of China research at CBRE Group Inc., a commercial real-estate services company based in Los Angeles.

Cooling economic expansion has pushed the yield on China’s benchmark 10-year sovereign note down 25 basis points this year to 4.3 percent. The yuan has fallen 2.5 percent against the dollar in the same period.

While China started allowing securitization in 2005, it halted the development in 2009 after a collapse in subprime RMBS triggered the global financial crisis. The government resumed approving issuance in 2012 with limits to ensure risks are properly taken into account.

Complication Risk

“MBS can help banks diversify risks and boost liquidity,” CBRE Group’s Chen said. “But if the financial engineering gets overly complicated, it may pose similar risks as what we saw in the U.S. subprime crisis. That’s why China has been cautious in developing the securitization market.”

Even with the gradual approach, sales have expanded at a faster pace this year. Chinese banks have issued 89.6 billion yuan of securitized products, compared with 3.6 billion yuan in the same period last year and 15.8 billion yuan for all of 2013, Bloomberg-compiled data show.

China Postal Savings will sell 6 billion yuan of AAA rated tranche A securities, 477 million yuan of A- rated tranche B notes and 341 million yuan of subordinated securities, according to the statement to Chinabond. The maturity date is December 31,


Economic Support

The residential mortgage default rate for China Construction Bank Co., the biggest provider of home loans in the country, was only 0.17 percent last year, compared with 0.99 percent for all types of lending, according to the bank’s annual report.

The relative safety of mortgages stems in part from the 30 percent minimum downpayment requirement for first-time home buyers. That is a high percentage globally, according to CBRE’s Chen.

“Risks of China’s RMBS are very low, in our view,” Chen said. “In China, mortgage default rate is the lowest among all types of bank loans. Also, China’s homebuyers are required to pay a minimum down payment of 30 percent, which is a high percentage globally.”

Xu Hanfei, an analyst at Guotai Junan Securities Co., also said the resumption of mortgage-backed securities is a signal that the government is relaxing controls on the property market.

“The regulators will accelerate approval of ABS and MBS to make better use of existing credit and support the economy,” Xu said.

— With assistance by Judy Chen

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