Beijing, Dec. 12 -- The central bank gave its long-awaited approval Friday for two milestone asset-backed security (ABS) issues, opening a new phase in the development of the country's capital market.

    China Development Bank (CDB), a policy lender specializing in infrastructure funding, would be allowed to issue up to 4.3 billion yuan (US$532.4 million) in asset-backed paper, the People's Bank of China (PBoC) said on its Web site.

    China Construction Bank Corp., China's third-largest State bank and its biggest housing loan lender, won authorisation to sell up to 3.1 billion yuan in mortgage-backed securities.

    Beefing up the bond market is a priority for China's policymakers as they seek to improve the efficiency of capital allocation in an economy dominated by banks more used to lending for policy reasons than for profit.

    "This is only the first batch of issues", said the PBoC, the central bank, which has been taking the lead in promoting bond market development in the face of resistance from the National Development and Reform Commission, China's main economic planning agency.

    China Development Bank has been waiting for months for the green light to issue asset-backed paper. It had planned to issue securities worth about 5.29 billion yuan, based on 62 loans offered to 12 industries from construction to electricity.

    More will come in the future," Geng Tiejun, an official in charge of the issue at the bank, told reporters.

    Securitisation, whereby revenue streams such as mortgages, credit card receivables and car loans are packaged together and sold to investors, is in its infancy in China.

    The two issues approved Friday will be the first to trade on China's inter-bank market.

    But the honor of issuing China's first asset-backed security went in September to cellular operator China Unicom Ltd., which sold 3.2 billion yuan of paper backed by its telephone revenue streams. The securities trade on the Shanghai Stock Exchange.

    Securitisation will improve banks' liquidity and their capital adequacy ratios, the central bank said.

    This in turn would further prepare these lenders for the competition they will face when China's financial market is fully opened to international rivals by the end of 2006.

    The asset-backed and mortgage-backed securities offer high liquidity, low risk and stable yields, thus providing a good alternative for traders' investment portfolios, the bank added.

    Because investors earn higher returns on bonds than on deposit with banks, policy makers hope a thriving fixed-income market would gradually help reduce China's very high domestic savings rate of around 50 percent of gross domestic product.

(Source: Shenzhen Daily/Agencies)