Early repayments shrink China’s mortgage-backed securities market by 65%

China’s residential mortgage-backed securities market has shrunk by almost two-thirds over the past year after a wave of early repayments from property owners that highlight the country’s constrained investment landscape.

The size of the market was Rmb363bn ($51bn) in March compared with more than Rmb1tn a year earlier, data from Fitch Ratings shows. Pre-payments leapt last year and are rising again, according to the rating agency.

In March, mortgages backing securitisations were repaid at the highest level this year, which would equate to a prepayment rate of 43 per cent on an annualized basis — about four times the typical rate.

Analysts said the data, which partly reflects the impact of the government having cut borrowing costs, was a sign of more households choosing to repay their debts in the absence of viable investment options and against an uncertain economic backdrop.

The securitisation industry, in which assets are packaged together and sold as bond-like instruments to investors, provides a window into China’s vast Rmb38tn mortgage market at a time when the property sector has struggled to reverse a multiyear slowdown.

The nationwide pre-payment rate on residential mortgage-backed securities initially leapt as high as 63 per cent on an annualised basis in September, when major state-owned banks unveiled cuts to mortgage interest rates that analysts say drove refinancing.

The move was one of several attempts to support the property market after a funding crisis among developers emerged in 2021 that weighed heavily on construction and the wider economy.

Tracy Wan, a senior director at Fitch Ratings, said the agency initially thought the pre-payment spike was a “one-off” from the policy change, given that banks in China may in many cases refinance an entire loan at lower rates. But the “acceleration” this year could partly be driven by customers choosing to deploy cash to pay down their debts rather than actively investing.

“Even before [the policy change], we have been seeing a steady increase in the pre-payment [rate]. People [were] feeling it’s not making sense to pay a high mortgage rate with a low yield from investments so they repay,” she said, pointing to low yields in wealth management products in particular.

Investors in mortgage-backed securities are exposed to “pre-payment risk” when the mortgages underlying their deals are repaid early and they need to find new places to park their cash at similar rates.

China’s mortgage market is dominated by state-owned banks, which are the largest in the world by assets. There has been no new issuance of mortgage-backed securities in China since 2022, according to data from provider CN-ABS.

“It’s all related to the property market . . . there are fewer people buying houses,” said Andy Lai, Asia-Pacific head of origination and structuring for asset finance and securitisation at BNP Paribas, on the decline in new issuance.

“There has not been that much investment opportunity 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 pre-pay mortgages.”

Jerry Fang, a director at S&P Global, said there were likely to be a “few factors” in the high pre-payment rate. He pointed to a rise in sales of existing properties, in contrast to concerns over purchases of new builds given the issues with developer finances.

“For the existing homes, the sales continue to grow,” he said, adding that this would lead to the pre-payment of some mortgage loans.

Additional reporting by Wang Xueqiao in Shanghai