Mortgage securitization is a long way off in China, and will not occur until the government makes major changes to its legal and investment framework, a research report recently issued in Beijing concluded.

"Presently, nationwide implementation of mortgage-backed securitization is still not feasible, although certain areas already possess the basic conditions where securitization may be done on a trial basis. If the trial proves successful, it may be expanded to the rest of the country," said Julia Fan, of China International Capital Corporation (CICC), a joint investment bank venture between state-owned Construction Bank of China and Morgan Stanley Dean Witter.

China's government is keen to promote mortgage securitization to raise liquidity in domestic banks. Last year, the central bank began allowing commercial banks to offer mortgages of up to 20 years, and announced that 15% of banks' total loans would be allocated for home mortgages.

Securitization of mortgages would stem a liquidity crisis that could arise as a result of banks' increased mortgage holdings, the report said.

But the report also underscored the difficulties of developing a secondary mortgage-backed market. Mortgages are still relatively new and expensive, and domestic banks lack large pools of mortgages from which they can extract reliable historical data, it noted.

Legally, special purpose corporations would be subject to high taxes, minimum capital requirements and restrictions on bond issuance. China also lacks qualified accounting and auditing personnel, financial guarantors, and domestic credit rating agencies.

The country has significant private savings of roughly RMB 5 trillion ($603.9 billion), but to date there are only six public investment funds, and they are restricted from buying a wide range of securities.

Still, there is hope for MBS in the larger cities, the report said. Shanghai has the largest and most developed real estate market in China, and since its banks have the largest pools of mortgages, it has the most potential for starting the domestic MBS market, it added. - VC

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