By James Kynge in Shanghai
The International Finance Corporation, the private sector arm of the World Bank, has made its first strategic investment in China's mortgage sector in an attempt to promote the development of a new market for mortgage-backed securities.

Javed Hamid, East Asia and Pacific director for the IFC, said the corporation's $2m (?1.6m, ￡1.1m) investment into a Shanghai mortgage broker, Anjia group, could be boosted at a later stage if a vibrant domestic market for mortgage-backed securities emerged.

"This is a small investment that may have a very major impact on the development of the financial system," Mr Hamid said.

China's government, which dropped previous plans for mortgage-backed securities in 2001, is once more galvanised in this direction, industry analysts say. Beijing has realised that not only would such instruments assist banks that have built up heavy exposure to the property sector, but they would also help deepen the country's underdeveloped capital markets, they say.

It is not yet clear how the envisaged market would work and officials are pondering different models, according to financial analysts.

One possibility under consideration would involve the transfer of mortgages from banks to a special purpose vehicle - perhaps a state-backed financial institution - which would then sell securities with a long maturity to institutional investors. Such a system would provide much-needed long- term instruments for investment from institutions such as insurance companies, which are keen to match their long-term liabilities.

It would also allow banks to increase their capital adequacy ratios by disposing of assets, and reduce their exposure to mortgages to below a central bank- mandated limit of 15 per cent of assets.

The IFC investment is intended to spur development in this direction. Anjia, as Shanghai's leading mortgage broker, is in a position to set standards in the provision of mortgages that would form the essential underpinning of any market in mortgage-backed securities, Mr Hamid says.

Anjia began operations three years ago, simplifying the process of obtaining a mortgage for transactions in Shanghai's secondary market. That market, which accounted for less than 10 per cent of residential property transactions in 2001, boomed last year to make Shanghai the first Chinese city in which the resale market has outstripped that for first-time buyers.

Back in 2001, it used to take three to four months to wade through the swamp of bureaucracy required to secure a mortgage for a re-sale property. Anjia, which takes fees from the bank and the buyer in return for shouldering the bureaucratic burden, has reduced the time necessary to only five days, says Alan Zhang, Anjia's CEO.