Attempts to get the first mortgage-backed securitization launched out of China continue, although it is still not clear whether any real progress is being made.
Australian firm Macquarie Securitization has been working for two years on the deal with the government-owned China Construction Bank, but both parties have been frustrated by regulatory and legal impediments.
Trying to set a target date for this deal has so far proved impossible, and although Macquarie has been reported as making positive noises for early next year, many market participants think this is still too optimistic.
China still does not have a specific securitization law and without a legislation that recognizes and makes allowances for the bankruptcy-remote nature of special purpose vehicles, any proper securitization of assets remains difficult.
"Unlike other countries that operate under civil law, China is governed under common law and for anything to be written into that you need a precedent case," explained Michael Yee, head of structured finance for non-Japan Asia with Moody's Investors Service. "In China, there are no specific laws or regulations that deal with securitization so nothing has really started there.
"One major factor is that it is not clear what an SPV is and there are no trust laws, so securitizations are difficult to do," Yee continued. "Banks have been trying to do an MBS for some time, but at this moment there isn't the framework in place to support sophisticated transactions. And as for getting the necessary legislation, I think that it's unlikely for the next couple of years because the government has to focus on other issues."
Other stumbling blocks for banks trying to launch transactions include the need to notify obligors of mortgage loans and certain tax issues. Without amendments to the current laws, the SPV would be regarded as a normal company and as such would be subject to withholding tax. Additionally, proceeds from the SPV would be liable for income tax.
One ABS professional at an investment bank in Hong Kong said that banks trying to drum up MBS business in China were nave. "Sure, if you look in principal at the possible figures for mortgage origination in China, then it looks pretty positive," he said. "But the truth of the matter is that home ownership is still a pretty new concept to the Chinese. And I guess that it needs to be far more established, before we can begin to look into securitizing those assets."
Despite the skepticism among some quarters, Macquarie is not the only western entity hopeful of bringing mortgage-backed securities out of China. In May this year, the U.S. Department of Housing and Urban Development (HUD), announced details of a joint venture, also with the China Construction Bank, to test whether there was any possibility of developing an MBS market (ASRI 6/5/2000 p.1).
The initial proposals included a test securitization that was scheduled to take place before the end of 2000. With the end of the year fast approaching, and no sign yet of any pilot bond issue, it would seem that HUD is learning just how difficult it is to do anything to schedule in the Chinese securitization market.