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China’s mortgage-backed securities market has shrunk by almost two-thirds in the past year, following a wave of early redemptions by property owners, highlighting the country’s limited investment landscape.
The size of the market stood at Rmb363 billion ($51 billion) in March, up from more than Rmb1tn a year earlier, Fitch Ratings data showed. Prepayments soared last year and are rising again, the rating agency said.
In March, mortgages backing securitizations were repaid at the highest level this year, representing an annualized prepayment rate of 43 percent – about four times the usual rate.
Analysts said the data, which partly reflects the impact of the government cutting borrowing costs, was a sign that more and more households were choosing to repay their debts in the absence of viable investment opportunities and against an uncertain economic backdrop.
The securitization industry, in which assets are packaged together and sold as bond-like instruments to investors, offers insight into China’s huge Rmb38 trillion mortgage market, at a time when the property sector has struggled to reverse a years-long slowdown.
The national prepayment rate on residential mortgage-backed securities initially rose to 63 percent annually in September, as major state-owned banks announced mortgage rate cuts that analysts said fueled refinancing.
The move was one of several attempts to support the real estate market after a financing crisis among developers emerged in 2021 that weighed heavily on construction and the broader economy.
Tracy Wan, director at Fitch Ratings, said the agency initially thought the spike in prepayments was a “one-off” change as banks in China can in many cases refinance an entire loan at lower rates. But the “acceleration” this year could be partly driven by customers choosing to deploy cash to pay down debt rather than actively invest.
“Even before [the policy change]we see a steady increase in prepayment [rate]. People [were] feel that there is no point in paying a high mortgage interest rate with a low return on investments so that they pay back,” she said, pointing to the low returns in asset management products in particular.
Investors in mortgage-backed securities are exposed to “prepayment risk” when the mortgages underlying their deals are paid off early and they have to find new places to park their money at comparable rates.
China’s mortgage market is dominated by state-owned banks, which are the largest in the world by assets. There have been no new issuances of mortgage-backed securities in China since 2022, according to data from provider CN-ABS.
“It all has to do with the real estate market. . . there are fewer people buying houses,” Andy Lai, head of origination and structuring for asset financing and securitization in Asia Pacific at BNP Paribas, said of the drop in new issuance.
“There haven’t been that many investment opportunities in China,” he added, pointing to “the economy, stock performance” and “restrictions on offshore investments.” “So one of the safe ways to invest money is to pay off mortgages in advance.”
Jerry Fang, managing director at S&P Global, said there are likely “a few factors” playing a role in the high prepayment rate. He pointed to an increase in sales of existing properties, in contrast to concerns about the purchase of new homes given the problems with developers’ finances.
“For existing homes, sales continue to grow,” he said, adding that this would lead to early repayment of some mortgage loans.
Additional reporting by Wang Xueqiao in Shanghai