Mainland pushes securitisation despite subprime turmoil

PUBLISHED : Thursday, 01 November, 2007, 12:00am
UPDATED : Thursday, 01 November, 2007, 12:00am

The mainland will go ahead with plans to introduce securitisation despite the turbulence triggered by the meltdown in US subprime mortgages, People's Bank of China governor Zhou Xiaochuan has indicated.

Mr Zhou also called for a more rational view of the economy and capital markets and said the central bank should be more flexible in managing liquidity, according to Shanghai Securities News.

Referring to lessons drawn from the crisis in the US subprime sector, Mr Zhou said securitisation was an important way to diversify risks.

'It is common to see crises and difficulties in the financial world. We cannot easily say no to securitisation as direct financing is an important channel for diversifying risks, which [we] cannot easily reject,' Mr Zhou told a financial forum at Beijing's Tsinghua University.

Citigroup chief Asia economist Huang Yiping said Mr Zhou's remarks suggested the government would introduce securitisation into the economy as planned although policymakers might be more cautious.

Securitisation is the process of converting existing assets or future cash flows into marketable securities.

Mr Huang said it might take some time for mainland investors to learn about the new product and understand the risks involved.

The mainland's strict capital controls have shielded the country from the fallout from the US subprime mortgage crisis. The country has been slow to adopt securitisation with only four deals since the market was launched in late 2005.

A recent Goldman Sachs report said the subprime turmoil could filter into mainland lenders as several big state banks could have exposure to such securities.

On Tuesday, Bank of China, the mainland's largest foreign-exchange lender, set aside an additional US$322 million against possible losses on its US subprime-backed assets.

Industrial and Commercial Bank of China, the world's largest by market capitalisation, earlier said it had US$1.22 billion in exposure to subprime mortgage securities, but the amount was small compared with its total assets.

Mr Zhou said that in the course of economic development, it was normal for major and minor crises to occur in the financial system.

'Finance has become the thermometer of economic development and a large portion of the crises and dilemmas facing the current financial system are a reflection of the problems of the whole economic system,' he said.