China to Permit Commercial Mortgage-Backed Securities

Financial experts believe that China is on the verge of permitting commercial mortgage-backed securities (CMBS) in order to boost its sluggish real estate market.

Bloomberg reports that two major Chinese financial institutions, China Merchants Securities Co. and China Chengxin International Credit Rating Co., predict the Chinese government will allow the sale of CMBS notes by the end of the year. The institutions base their prediction in part on the government’s decision to permit similar securities for home loans last year.

Premier Li Kequiang implemented the changes soon after new housing prices began to drop. Securities were prohibited in China in 2009 because of the global financial crisis. However, China’s economic growth rates have declined over the years, reaching its lowest level since 1990. As a result, Kequiang is permitting residential and commercial securities with the hope it will revitalize the economy.

“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 director of structured finance at China Merchants Securities and the underwriter of the first residential mortgage-backed securities deal this year. “The regulators are trying to improve property purchases in a gradual and an appropriate way.”

Chinese banks and financial institutions have been cautious since 2009 after having witnessed the economic meltdowns of the United States and other countries. Since 2011, Chinese banks have reigned in home lending deals to prevent the country’s real estate “bubble” from bursting, and it shows. For example, the growth rate of property loans in January and February of this year was 0.6%, which is quaint compared to the 27% annual growth rate for all bank lending.

“As the property bubble ballooned, Chinese banks have curbed real estate lending,” said Zhang Yingjie, a deputy general manager at China Chengxin International. “Selling mortgage-backed securities can help banks transfer the risk of the loans to buyers of the products.”

The United States is ahead of China in terms of permitting CMBS notes. There are, for example, 11,000 CMBS loans maturing between now and 2017.

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