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China RMBS: safe play or financial Russian roulette?

Leslie Shaffer | Writer for
China Photos | Getty Images

China's property market may be troubled, but its lack of mortgage securities allowed it to skirt one of the systemic causes of the U.S. property crash, until now.

Postal Savings Bank of China (PSB) last month issued the mainland's first residential mortgage backed security (RMBS) since 2007, wrapping more than 23,000 mortgages totaling around 6.81 billion yuan ($1.1 billion) into a security. PSB didn't immediately return an email seeking comment.

But comparisons with the U.S. RMBS which became a global albatross from 2007, taking down property values as well as financial institutions across the world, may be premature.

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"The concerns in the U.S. RMBS were mainly related to the subprime RMBS," said Jerome Cheng, senior vice president at Moody's Investor Service. "There are not subprime mortgages in China at the moment," he added.

Not only does PSB's RMBS have a weighted loan-to-value of around 61 percent, but it also excludes "liar's loans," or mortgages without documentation of the buyer's income or credit history, through the underwriting process, Cheng noted.

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Others also don't believe China's fresh foray into RMBS would matter much to the property segment.

"It's too early and too small," said Nicole Wong, regional head of property research at CLSA.

Indeed, PSB's offering doesn't just rank as the first since 2007, it's only China's third RMBS ever, after China Construction Bank (CCB) issued one for 3 billion yuan in 2005 and another for 4 billion yuan in 2007. CCB didn't immediately return an emailed request for data on how its RMBS have performed.

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By comparison, around $668 billion worth of mortgage-related securities were issued in the U.S. from January to July of this year, according to data from the Securities Industry and Financial Markets Association (Sifma).

It could be awhile before the segment could present the sorts of risks seen in the U.S. before the financial crisis, said Steve Wang, chief China economist at Reorient Financial, noting that securitization of loans in general is quite new on the mainland.

"China will try to keep it plain vanilla in the beginning, just to see how it works and to figure out how different loans default," Wang said. In the beginning, "the best assets [will be] in this and other asset-backed securities," he said.

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"In the U.S., it wasn't until the end when banks started to play tricks" on what was included in asset-backed securities, he noted.

Wang expects the RMBS will see a lot of interest from insurers, noting the longer maturity will suit their needs. The weighted average portfolio yield of nearly 6 percent on PSB's RMBS compares with an around 3 percent deposit rate at banks.

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Indeed, mortgages may be the least of the problems in China's property sector.

Default rates of mortgages on the mainland appear relatively low. CCB's 1.88 trillion yuan worth of residential mortgages on its books at the end of 2013 had a non-performing loan (NPL) ratio of 0.17 percent, compared with its overall NPL ratio of 0.99 percent, according to its annual report. It's similar to competitor Bank of China, which has a 0.35 percent NPL ratio on its 1.28 trillion yuan worth of mainland mortgages, compared with a 0.96 percent overall NPL ratio, according to its annual report.

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"The China property market problem is always physical excess," CLSA's Wong said. "Too much has been built in cities that are not growing in terms of population and capital."

Concerns that China's property market is a popping bubble have moved to the front burner recently, with new home prices in July fell 0.9 percent from June, dropping for the third month in a row, with 64 out of 70 cities surveyed showing month-on-month declines. Property is estimated to account for around 20 percent of the mainland's gross domestic product.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter