China Construction Bank plans to raise about 2 billion yuan (US$292 million) in China's first domestic commercial mortgage-backed bond sale, according to insiders yesterday.

China Construction has hired Standard Chartered as financial adviser for the sale, which will need government approval that's expected next year, the insiders said.

China's government is seeking to develop bond and asset-backed securities markets to reduce companies' reliance on bank loans and cut risk for lenders. Chinese banks may increase the diversity of loans they securitize to meet regulatory capital requirements and win business as lending remains controlled by the central bank, according to Moody's Investors Service.

"It's in everybody's interest to develop China's securitization market, since it provides Chinese banks with a new funding avenue and risk-management tool," Michael Ye, a Beijing-based managing director of Moody's, told Bloomberg News.

China Construction, the country's second-largest mortgage lender after the Industrial and Commercial Bank of China, sold 3 billion yuan of securities backed by residential home loans in 2005, the nation's first such sale, after it was chosen by the government for a pilot program. Asset-backed bonds were not previously available in China. In a securitization, a company pools loans such as mortgages and credit card receivables, packages them into securities and sells them to investors, usually through a trust.

In 2006, Citigroup Inc helped the Macquarie Wanda Real Estate Fund sell US$145 million of bonds backed by nine Chinese shopping malls housing Wal-Mart Stores outlets and Time Warner movie theaters. China, South Korea and India are driving Asia's asset-backed securities market this year while demand for the assets in other countries stagnates amid the global credit crisis, Moody's said in September. Mortgage-backed bond sales almost tripled between 1996 and last year to US$7.27 trillion, according to the Securities Industry and Financial Markets Association.

China's government is expected to amend regulations for asset-backed securitization after two rounds of pilot programs, according to Moody's.

The country's financial institutions raised 16.5 billion yuan in the first half of this year from securitization deals, the rating assessor said.

Securitization allows the originating company or bank to get cash up front while investors are paid from the individuals' or companies' monthly payments.

The issuer can also record profit from selling assets to the trust and take the loans off its balance sheet.

That reduces the amount of capital required as a buffer against losses, enabling banks to increase earnings by using the money elsewhere.

(Shanghai Daily November 6, 2008)