China will expand the scale of its bond market by promoting the issuance of diversified products next year to help reduce the economy's heavy reliance on a bad loan-ridden banking sector.

　　Mu Huaipeng, director of the Financial Markets Department of the People's Bank of China (PBOC), the central bank, said his bank plans to upscale the issuance of newly launched products next year.

　　In particular, asset-backed securities (ABS) and mortgage backed securities (MBS), each of which saw the approval of their first ever issuance earlier this week after six years of research by regulators, have huge market potential, said Mu.

　　China's rapidly growing economy, which is estimated to expand by 9.4 per cent this year, is still more than 80 per cent funded by bank loans. To reduce the risk of relying on the banking sector, the authorities have taken a slew of measures over the past two years to accelerate the growth of the bond market.

　　New products include subordinated bonds by financial institutions, short-term commercial paper (an unsecured short-term debt instrument), Treasury bond forward (a marketable, fixed-interest debt security), and most recently, securitization (the process of aggregating similar instruments, such as loans or mortgages, into a negotiable security).

　　The PBOC said on Monday it had approved the issuance of 4.3 billion yuan (US$518 million) in bonds backed by loans owned by the China Development Bank (CDB), a policy-oriented lender that focuses heavily on long-term lending to infrastructure projects.

　　The nation's first-ever MBS issuance was a 3.1 billion yuan (US$382 million) batch of bonds backed by mortgages made by the China Construction Bank, a State-owned lender that listed on the Hong Kong stock exchange earlier this year.

　　"We will conduct a comprehensive appraisal and summary after the issuances (before moving further)," Mu told reporters. "We will not rest where we are on the front of financial innovation."

　　Both issuances will end tomorrow.

　　Mu did not give any timetable on further liberalization on this risky but useful financial product, which is highly developed in mature markets, but stressed the key significance of securitization to the economy.

　　Securitization can help correct a widespread term mismatch between assets and liabilities of Chinese banks, and help the banks improve liquidity by turning mostly long-term assets into liquid securities, the official said.

　　China's financial authorities have been warning local banks about a mismatch between their assets and liabilities. The banks are taking a growing percentage of short-term deposits as depositors expect further interest rate increases, and making growing amounts of long-term loans to seek stable interest income.

　　But "should bank credit tighten and diversion of savings (out of banks) accelerate, the commercial banks may face liquidity risks," the PBOC said in the China Financial Stability Report released last month.

　　Securitization can also help commercial banks raise the capital adequacy ratio, on which the authorities are enforcing stricter requirements, by reducing risk assets, spreading credit risk, and accelerating the growth of the bond market, Mu said.

　　The first two issuances look set to be met by strong market demand. "The market has been anticipating this for a long time," said Li Zhiqiang, an analyst with CITIC Securities. "There is huge demand for bonds in the marketplace, and the two batches are not huge."

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