MBS unlikely to find favor in China

The People's Bank of China and the China Banking Regulatory Commission recently issued a joint policy announcement calling on banks to raise funds for home loans through the issuance of mortgage-backed securities (MBS).

Mortgage loans are known for their illiquidity and can take decades to mature. What's more, such loans already account for about two-thirds of commercial banks' overall real estate loans, a high proportion which reduces lenders' funding efficiency.

MBS are a financial innovation developed in the US, allowing commercial banks to bundle mortgage loans together into securities which generate steady streams of principal and interest payments. These securities are usually secured by a government-backed institution, such as the US's Fannie Mae and Freddie Mac.

MBS are underdeveloped in China for a number of reasons. First, there are no State-backed institutions in the country which can provide credit guarantees. Second, it is difficult to fix prices for such products, making them unattractive to both issuers and investors. Looking ahead, it will also be difficult for these securities to gain traction in the local market without further liberalizing interest rates.