A change in China's constitution enshrining the right to own property could breathe life into a flagging banking industry in the coming years by spurring mortgages and securities linked to them.
Economists say last month's move by Beijing to abandon one of its main communist tenets helped allay already receding fears it could one day seize newly bought property, laying the foundations for a more mature and less disorderly real estate sector.
The landmark amendment will probably speed up the arrival of mortgage-backed securities - discussed for over half a decade - and encourage would-be home-owners to take the plunge.
"It tells the public there's nothing wrong with private ownership of property and it tells officials that anyone who violates this right is breaking the law," said Wen Hai, professor of economics at Peking University.
"Before, people were still afraid," he said. "And many private businessmen who made big profits were worried, so they deposited them abroad or spent them instead of investing."
Officials have said a market for Mortgage-backed securities - where investors buy loans from banks to receive interest payments from homebuyers and owners of commercial buildings - might be created this year.
Analysts say such an instrument would entice foreign investors eager for a piece of the action but wary of corruption and government measures to cool the red-hot property market.
"They've been talking about securitisation since 1996 so there should be some fruit," said Leigh Zhang of Macquarie Securitisation Shanghai Ltd, which counts former Australian prime minister Paul Keating as a major shareholder. "This year, a lot of reforms are happening and there are positive signs."
Chinese banks have offered mortgages only since 1997, when the government decided to promote private housing to reflect a rapidly shifting economic landscape, and struggling state firms could no longer afford to lodge all workers.
As the private sector grows and foreign investment pours in, farmers are buying one-way bus tickets to cities, and the urban middle class is leaving crumbling houses for sparkling new flats.
From 1998 to 2003, the value of outstanding property-related loans increased six-fold to 2.133 trillion yuan ($257.7 billion), or 12.8 percent of total loans in the banking system.
Mortgages made up around 60 percent of that, though developers say people still turn up at housing projects with suitcases stuffed full of cash.
Banks, from top property lender China Construction Bank to smaller commercial banks such as Merchants Bank and Pudong Development Bank, want to lend more to homebuyers but are short of available cash.
Some are struggling with bad loans to state enterprises and tighter reserve requirements on weak banks imposed by the central government, which is worried that over-exuberance in the property market could spark still more bad loans in future.
By issuing mortgage-backed securities, banks could profit by matching investors with borrowers, and free up funds for lending. This would galvanise the wider economy, said Anthony Lok, a Hong Kong-based analyst at BOC International.
"Everyone has property, whether it's mud huts or high-rises. But if it's not monetised, you can't develop the rest of the economy," Lok said.
Foreign investors would also be keen on the securities particularly because mortgage delinquency rates are only around 0.5 percent and defaults much less, analysts say. But banks might be a little reluctant as lifting good loans from the books shifts the spotlight to $300 billion of bad loans in the system.
Mortgage rates in China are just under six percent. Although investing directly in a development typically promises 25-percent returns, many foreign investors would prefer to buy securities rather than take exposure to the physical property market, which has been hit by property corruption scandals.
Macquarie has talked to several banks, including Pudong Bank and Merchants Bank, about acting as a consultant on the issuing of mortgage-backed securities.
But authorities first need to create a nation-wide credit rating system and introduce a bankruptcy law it has been drafting since 1997, Macquarie's Zhang said. Banks are now in limbo with defaults, allowed to foreclose on assets but not sell them.
Arthur Lau, banking analyst at Fitch Ratings Agency in Hong Kong, expects the law to be introduced before China fulfils commitments to open up its banking sector by 2007.
"A lot of foreign investors and foreign banks want to get a piece of property investment in China, but the laws are not there and they don't have the instruments," Lau said.
"If there is any securitisation, foreign investors will be more than willing to invest given the good quality of the portfolio," he said, referring to mortgages.
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