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WHAT ARE THE MONEY MANAGER AND INSTITUTIONAL PORTFOLIO MANAGER

THE OVERSEAS MARKET

FINANCIAL DATA

THE EARNINGS RECORD

RATIOS

Growth of the primary andsecond ary mortgage markets is now an avowed goal of PRC public policy strategy. Conversion of public housing to private is viewedas a path to liquefying the largest collective national asset - the nation's housing stock. The process of mortgage issuance andsubsequent securitization wouldconvert the illiquidhousing capital into fungible capital needed elsewhere. The emergence of a dynamic housing finance system, able to interface with international capital markets, is a crucial, yet to be accomplished, link among general economic, financial and housing policies. The subsidized housing system started to be rapidly dismantled after 1998, andthe government began to encourage people to buy andown their own homes.

Commercial banks together with the Housing Provident Fund (HPF) programme establishedin 199016 are the key elements in the nascent Chinese mortgage market. The HPF scheme is modelled after the Singapore provident fundsystem, andrequires compulsory saving by employees (plus contributions from employers) for entitlement to a housing loan in the future. The Municipal Housing Fund Management Centre, an arm of the Beijing Municipality, has been providing home mortgages in Beijing since 1994. Effectively, it has been the nodal agency in the effort, together with the China Construction Bank andthe China Industrial and Commercial Bank.

Three different types of home mortgages were promotedtowardthe end of the 1990s in Beijing: the housing provident fund mortgage, commercial bank mortgage andhybridmortgage (combining the two). In the recent past, most housing purchases were the result of sales to the sitting tenants by work units (as a part of the broader process of privatization of state-owned enterprises), andthe price was relatively low; of course, there was little needfor a mortgage. With increasing provision of high-quality commercialprivate housing, the demand for mortgages has increased, and of the total loans issued, 80% of the funds are now used by highly-paid private-sector employees, in a situation somewhat similar to that in India.

The transformation of the current primary andsecond ary housing finance system is not an easy set of tasks, given the sheer size of China. Further, the transformation of the housing finance system requires the development of new andnecessary legal andinstitutional structures that do not necessarily exist in China. The politico-economic governance structure of China is complex, with a diverse set of regional and group interests, many of which will make the transition for the economy, andby extension for the housing finance system, difficult.

While China seeks to establish itself as the 'work bench' of the worldin order to foster its economic growth, there are a number of significant obstacles to the strategies of both general growth andthe transformation of the housing finance system. First, as in many other developing countries, the house price-to-income ratio is high, relative to that in the developed countries. Moreover, the geographic distribution of income is skewed towards the coastal areas. In Shanghai, for example, the per-capita income is about US $5,000, while in parts of western China per capita income is less than a US $1,000 per year. These magnitudes of geographic economic disparities generate interregional social tensions as well as intra-country mobility pressures.

It is difficult to assess how the social flux in China complicates its transition. In particular, PRC's demographic profile is becoming older quickly. This has been causedin part by the One ChildPolicy, which has slowed the population growth significantly, andhas causedChina, with increasing longevity, to be on the roadto becoming a much older society. In some ways, China is in a race to improve the standard of living of its residents before its mighty labour force becomes a smaller proportion of its total population. Furthermore, the One ChildRule has changedthe very social fabric of China, where large families were once the standard, and no longer can or will be. The socioeconomic impacts of these demographic changes are unclear, and are likely to have significant effects upon the nature of the needs for housing in the future. The massive churning andinternal migrations of the labour force, in the absence of a functioning housing market anda state retreating from housing provision, may create additional problems.

Finally, the Chinese economy in general, andthe financial system in particular, are simultaneously astride 'two horses', as it were. The financial system reflects a legacy of both administrative controls and market mechanisms, andthe banking system is not necessarily responsive to market incentives alone. In essence, this situation has generateda banking system that necessitates the needfor major, systematic reforms. In the long run, the banking system may have to confront the Herculian task of becoming competitive in the worldfinancial arena.