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A leading Chinese property lender launched the country's first residential mortgage-backed securities on Thursday .
The China Construction Bank (CCB), told the media the securities were valued at roughly 3 billion yuan (US$370 million).
That accounts for just 1 percent of the bank's outstanding mortgage loans, but industry observers say the pilot move is of great significance to investors and the financial market.
Securitization, which originated in the United States in the 1970s, has become a major financial instrument in modern finance. It bridges currency and capital markets, and eventually translates assets into cash flow.
The new securities from CCB, for instance, are a batch of bonds collateralized by a pool of mortgage loans, including a variety of tranches and maturities, as well as returns and risk levels -- in order to cater to varying needs from investors.
After selling the bonds, CCB will have recalled its loans -- usually long-term ones -- and may use the money for more lending in pursuit of incremental interest rate income. In another word, the bank's "liquidity" will thus increase.
For the bond buyers, which will be confined to institutional investors for the time being will reap in handsome coupon income -- at the sacrifice of the CCB's interest income from its mortgage loans.
But the bond investors also bear certain risks in the event the CCB loan assets turn sour.
CCB chairman Guo Shuqing affirmed that the 15,162 lots of residential mortgages, which are chosen to form the asset pool for Thursday's bond issuance, are "quality assets" of the CCB's branches in Shanghai, Jiangsu and Fujian.
The CCB-sponsored bonds will commence trading in China's inter-bank bond market in two months as scheduled. CITIC Trust & Investment Co., Ltd. will be the trustee and issuer of the CCB's residential mortgage-backed securities.
"As the first Chinese commercial banks to create these securities, we have been searching for a method to increase the stability of the financial system, speed development, and enhance the efficiency of China's financial markets."
The State Council, China's highest governing body, gave the green light for financial institutions to push for asset securitization early this year, and the country's banking watchdog issued detailed regulatory measures just a month ago.
(Xinhua News Agency December 16, 2005)
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