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Cover Stories Series 2014> Reform Initiatives Underway for 2015> Retrospect> Feature
UPDATED: November 2, 2014 NO. 45, NOVEMBER 6, 2014
More Liquidity, Greater Risks?
After being introduced into China nine years ago, mortgage-based securities finally get the chance to realize their full potential
By Deng Yaqing

Yu argued that the space for the development of the MBS market in China will remain quite limited until interest rate liberalization becomes a reality, and the country urgently needs a top-level design and a fully market-oriented interest rate system.

No risk, no reward

Some analysts have noted that since economic leverage in China now is relatively high, the aggressive promotion of MBS products may only add to the financial risks of the property market rather than alleviating them. In addition, the firewall shielding the financial system from real estate bubbles will collapse.

If financing tools such as MBS and real estate investment trusts are multiplied, the financial behavior of property developers will become more marketized, the eruption of risks will be further postponed, and the risk chain extended, said Zhang Xu, an analyst from Shanxi Securities.

Zheng Yujie, a senior research fellow from China Investment Consulting, opined that when pushing forward the issuance of MBS products, banks should prevent and control real estate financial bubbles by engaging in more thorough examinations of the qualifications of homebuyers, rather than fixing their sights on private gains.

In the United States, its birthplace, MBS at one point significantly propelled the development of both the financial market and the real estate market. However, when Fannie Mae and Freddie Mac pursued overexpansion by repeatedly packaging non-performing underlying assets into MBS products, property bubbles burst and the subprime mortgage crisis broke out. As a consequence, America's real estate market and financial system fell into an unprecedented morass. In 2007, its MBS balance grew to $9.3 trillion, with the securitization rate of home mortgages hitting 64 percent.

Lu Zhengwei, chief economist with Industrial Bank, held that the MBS problem in the United States was a result of the accumulation of non-performing underlying assets. In other words, financial institutions lent their money to people who could not afford to repay mortgages. In stark contrast, down payments for home loans in China account for at least 30 percent of the total loan, and home loans enjoy the lowest bad debt ratio among all other categories of loan in the country.

"The United States suffered the subprime mortgage crisis partly because the proportion of down payments to home loans in its mortgage market commonly ranged between 5-10 percent, or even zero. When housing prices fell, mortgage-backed securities were quickly reduced to negative assets," said Yang Hongxu, Deputy Director of Shanghai E-house Real Estate Research Institute, warning that supervision loopholes, unbridled speculation and excessive securitization caused the financial collapse.

"Compared to the United States, home mortgage loans in China are low-risk quality assets. Therefore, efforts should be made to actively promote the expansion of MBS," said Yang.

Lian Ping, chief economist with Bank of Communications, noted that though the Chinese Government has unveiled a series of real estate regulatory policies such as property-purchasing limitations and loan restrictions, housing prices had been climbing year on year. "Housing prices will level out in the second half of next year, and a further decline is not likely," said Lian.

Email us at: dengyaqing@bjreview.com

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