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World bank arm invests in china loan sector { February 24 2004 } Original Source Link: (May no longer be active)
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World Bank arm invests in China loan sector
By James Kynge in Shanghai
Published: February 24 2004 22:43 | Last Updated: February 24 2004 22:43
The International Finance Corporation, the private sector arm of the World Bank, has made its first strategic investment in China's mortgage sector in an attempt to promote the development of a new market for mortgage-backed securities.
Javed Hamid, East Asia and Pacific director for the IFC, said the corporation's $2m investment in a Shanghai mortgage broker Anjia group could be increased later if a vibrant domestic market for mortgage-backed securities emerged.
"This is a small investment that may have a very major impact on the development of the financial system," Mr Hamid said.
China's government, which dropped previous plans for mortgage-backed securities in 2001, is once more galvanised in this direction, industry analysts say. They add that Beijing has realised that not only would such instruments assist banks that have built up heavy exposure to the property sector but would also help deepen the country's underdeveloped capital markets
It is still unclear how the envisaged market would work. Officials are pondering different models, analysts say.
One possibility would involve the transfer of mortgages from banks to a special purpose vehicle - perhaps a state-backed financial institution - that would then sell securities with a long maturity to institutional investors. Such a system would provide much-needed long-term instruments for investment from institutions such as insurance companies, which are keen to match their long-term liabilities.
It would also allow banks to increase their capital adequacy ratios by disposing of assets, and reduce their exposure to mortgages to below a central bank- mandated limit of 15 per cent of assets.
The IFC investment is intended to spur development in this area. Anjia, as Shanghai's leading mortgage broker, is able to set standards in the provision of mortgages that would underpin any market in mortgage-backed securities, Mr Hamid says.
Anjia began operations three years ago, simplifying the process of obtaining a mortgage for transactions in Shanghai's secondary market. That market, which accounted for less than 10 per cent of residential property transactions in 2001, increased last year to make Shanghai the first Chinese city in which the resale market has outstripped that for first-time buyers.
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