The development of China’s securitisation market hinges on the strength of the country’s legal framework and the risk of default of underlying assets, according to Moody’s.
Officially established in 2005, Beijing stopped the securitisation market in 2009 due to the global financial crisis, resumed it in 2012 and has gradually expanded it since then.
“Chinese authorities reckon securitisation is a good tool to diversify financing channels for SMEs, agricultural sectors, and urban development projects,” Moody’s senior-vice president Jerome Cheng told FinanceAsia. “They have been promoting the healthy development of securitisation,” said Cheng.
And the market has been booming this year. As of July 20, issuance doubled to Rmb200 billion ($33 billion) from last year’s total of Rmb67 billion, according to local data provider DZH.
Banks have accounted for more than 80% of the total securitisation market since 2012 due to the issuance of more than Rmb100 billion in collateralised loan obligations (CLOs), according to a Moody’s report.
New issuers and products are set to enter the market, which has been mainly concentrated in CLOs and asset-backed securities (ABS) backed by car loans.
Postal Savings Bank of China sold a Rmb6.8 billion residential mortgage backed security (RMBS) on July 25, the mainland’s first in seven years.
In June, Shenzhen-based Ping An Bank issued Rmb2.6 billion of consumer loan asset-backed securities on the Shanghai stock exchange - the first ABS product in the domestic securities market.
Foreign investors can invest in mainland securitisation products through the central bank’s inter-bank bond market, qualified foreign institutional investors (QFII) and renminbi qualified foreign institutional investors (RQFII) schemes.
Cons
However, a big concern for investors is also a familiar one that hangs over other areas of finance, according to Cheng - the quality of legal protection.
There is a lack of legal framework to offer comprehensive guidance for securitisation in China.
At present, the Credit Asset Securitisation scheme offers some guidance for such products, while the Trust Act and the Securities Law only provide preliminary reference to securitisation transactions.
Securitisation products straddle several financial industries, including securities, guarantees and trust business, leaving some blank spots in terms of regulation.
“Securitisation transactions are very complicated and have multiple participants. A specific law for securitisation is needed,” said Ba Shusong, deputy director-general of finance research institute, development research centre of the State Council, in a research report.
“Securitisation is a business across many industries; the cooperation between regulators and coordination by one single department may be a way out,” said Ba in the report.
This is especially critical when it comes to the possibility that the underlying portfolio defaults.
Securitisation helps to remove a loan from a domestic bank’s loan book and transfers it to an issuing vehicle such as a trust, which can shift risks away from the bank.
“If the underlying portfolio’s performance deteriorates and the collections from the underlying pool is insufficient to repay the note in full, investors have no right to go after the bank as the bank is not required to cover the shortfall,” said Cheng.
Furthermore, the likelihood of defaults has increased in the onshore corporate bond market during this year.
Shanghai Chaori Solar Energy Science & Technology is the only default of a listed corporate bond so far, in March when it failed to meet part of an interest payment on Rmb1 billion of debt.
Meanwhile, Huatong Road & Bridge Group was close to default but was saved at the last minute by Shanxi provincial government, which paid all principal and interest on Rmb400 million worth of bonds on July 23, the mature date of the notes.
While securitisation is providing an alternative source for corporate, especially banks, without further stress their balance sheets against a backdrop of tightening credit in China, risks remain in the market.
There is a lack of economic benefit for companies to issue RMBS if the portfolio yield is close to the all-in funding costs. For example, the weighted average portfolio yield of the PSB’s RMBS deal is 5.88%, but the lender needs to pay investors 5.8% and 6.8% for the two tranches of the RMBS product.
Products
For further development, the securitisation market could offer more products, liquidity and more attractive prices for investors, according to Moody’s Cheng.
In terms of volume, asset securitisation products in the US peaked in 2007, accounting for 35% of the US's securities market, although mortgage delinquencies and foreclosures and the devaluation of housing-related securities led to the country’s subprime mortgage crisis.
China's asset securitisation products, however, comparably lagged too behind, accounting for merely 0.39% of its securities market, according to a recent UBS Securities report.
So far the range has been limited.
Going forward, the market will see more products like equipment-lease transactions, said Moody’s Cheng.
Another opportunity for development is the luring of foreign investors.
Although international investors have already invested in the domestic market via their local subsidiaries or RQFII, direct placement in the offshore market will take more time, Cheng said.
Pros
RMBS opens another window outside traditional bank lending. With the help of securitisation, the banks securitise their corporate loan portfolios to reduce their exposure to corporate loans, revitalise their balance sheets, and secure new funding said Cheng.
Securitisation also brings intermediate business incomes and increases profit level. For instance, every Rmb1 trillion worth of securitised asset can increase the net profit of the banking system by about 0.25%, according to the UBS Securities report.
“At this moment the liquidity is still tight, but I believe things will change as the market develops,” said Cheng.
