The Hong Kong Monetary Authority is to proceed with the setting up of a mortgage corporation in Hong Kong within the next 12 months.

The corporation will be established as a limited company, owned by the Hong Kong Government, with a capital base of HK$1bn. It will operate by buying mortgages from commercial banks and fund its acquisitions by issuing bonds.

One of the major reasons behind the setting up of the corporation is the HKMA's fear that a high proportion of banking sector loans are property loans. As a result banks face a huge mismatch in funding receiving most of their funds as deposits available for immediate withdrawal while funding mortgages with maturities of up to 25 years.

The most interesting aspect of the announcement is the impact of the corporation on the Hong Kong capital market. It is possible that the notes may be granted a tax concession and be eligible for use as repo securities. A favourable rating and low risk weighting will add to the appeal of the paper. Besides adding depth to the market in themselves, it is hoped that the existence of such bonds would make it easier for issuers of mortgage backed securities by setting a standard type of issue and by familiarising investors with mortgage risk.

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