[BEIJING] Just as China's residential mortgage-backed securities market has left the launch pad, it faces a headwind from a regulatory crackdown on the red-hot property market.
RMBS issuance almost tripled this year to 72.8 billion yuan (S$14.8 billion), according to data from Chinabond and the Shanghai Clearing House. They now account for 40 per cent of all the asset-backed securities issued in China's interbank bond market this year, up from 6 per cent in 2015.
Offerings of collateralised loan obligations, which are securities backed by business lending, shrank this year and are almost on par with RMBS.
Mortgage-backed debt is winning mounting support among regulators, who reversed course in 2012 to allow asset-backed bonds they'd banned in 2009 after the products helped spark the global financial crisis.
While high down payment requirements to buy homes in China help reduce risks, investors could face losses in any sharp correction in housing prices, according to Moody's Investors Service. While the real estate market is still strong, China's leaders pledged to curb asset bubbles after a meeting in July and major cities have since unveiled curbs on speculative home buying.
"RMBS is relatively new in China and the economy hasn't really gone through previous crises," said Jerome Cheng, analyst at Moody's in Hong Kong. "If there is a hard landing, there will be a rise in default rates in banks' mortgage portfolios too."
Because the government sees the housing market as a pillar of growth in China's economy, there has been a regulatory push to promote RMBS, according to Hilary Tan, director for structured finance at Fitch Ratings.
China's central bank said in February it will allow banks to cut the minimum required mortgage down payment to 20 per cent from 25 per cent for first-home purchases to the lowest level ever as it steps up support for the property market.
That is still high compared with zero down payment requirement for many home buyers in the US prior to the housing crisis. Tighter requirements for second-home buyers will help limit risks, Mr Tan said.
"China's economic slowdown has had an impact on the demand for borrowing by corporates and in turn the need to revitalise capital," he said. "The concern about easy credit and loosening of underwriting standards will always be present."
Last week alone saw three RMBS offerings totaling 22 billion yuan. Bank of China Ltd sold 10.4 billion yuan of such securities on Sept 6 with the nine-month senior tranche priced at 2.45 per cent, 27 basis points lower than the average yield on like-maturity AAA rated corporate notes.
Despite the relatively low yield, demand for RMBS has been strong due to a lack of safe assets promising decent returns, according to JPMorgan First Capital Securities Co.
"Commercial banks, asset managers and insurance companies are investing in RMBS," said Wang Xuebin, executive manager of investment banking department at the firm in Beijing. "We have seen orders multiple times the issuance amount because investors are attracted by the high quality of the underlying assets."
Regulators are acting to cool the property market. Shanghai, where prices of new homes jumped 12.6 per cent in August from July, is preparing to discuss fresh curbs including potential restrictions on mortgages and loans to developers, according to people familiar with the matter. Beijing and Tianjin are also contemplating new measures to rein in prices.
"The RMBS market will see two challenges," said Jiang Guo, deputy head at the fixed income department of China Securities Co.
"A potential tumble in the real-estate market will bring risks to underlying assets, and a narrowing yield premium will make the products less appealing."