China's securitisation market revs up

Real demand has become the major force driving the market, which has been concentrated on collateralised bank loans and asset-backed securities backed by car loans.
Global automakers are setting up auto ABS platforms in China, the world's largest auto market
Global automakers are setting up auto ABS platforms in China, the world's largest auto market

China’s securitisation market is set for explosive growth in the coming years as demand from issuers and investors increases sharply.

The market will grow at an annual rate of 40% to Rmb2 trillion ($319 billion) in five years time, the China International Capital Corporation estimated in February.

The boom began in 2014, when the total issuance of Chinese securitisation products grew 10-fold to Rmb326.4 compared with the previous year, according to domestic data provider Wind Info.

New products are set to enter the market, which has been mainly concentrated in collateralised bank loans and asset-backed securities backed by car loans.

“We expect to see more barriers broken down, with a flurry of new asset classes and originators in 2015,” Jian Hu, a managing director at Moody’s, said.

New asset classes include equipment lease, real estate loans, and consumer loan securitisations, sponsored by both existing and first-time issuers, such as commercial banks, local branches of international bank, financial leasing companies, and asset management companies, Hu told FinanceAsia.

On July 25, Postal Savings Bank of China sold a Rmb6.8 billion residential mortgage backed security (RMBS), mainland China’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 on the domestic securities market.

Market issuance so far has been dominated by corporate loan-backed securitisations and more than 90% of the issuers have been banks. (See table)

Regulatory-driven to demand-driven

As with any other nascent, niche financial market in China, the securitisation market has evolved under the impetus of the authorities.

The market was closed from 2009 to 2011 as the Chinese government fretted about potential spill-over from the US subprime mortgage crisis.

Beijing reopened the market in 2012 as that crisis calmed down and as China satisfied itself that it was on top of its credit risks.

A subsequent justification for the market’s reopening is Beijing’s need to ameliorate a slowdown in economic development, including reducing the economy’s reliance on banks. The government has set a 2015 GDP growth target of “around 7%” after the economy last year expanded by 7.4% – its slowest rate in 24 years.

Securitisation can bring intermediate business incomes and increases profit level for issuers.

For instance, every Rmb1 trillion worth of securitised asset can increase the net profit of the banking system by about 0.25%, according to UBS Securities research.

The country’s regulatory clampdown on shadow banking – less-regulated, riskier type of lending that is hard to detect on the balance sheets of banks – has also created opportunities for the development of the securitisation market.

With the help of securitisation, banks can securitise their loan portfolios to reduce their exposure to some non-performing loans, revitalise their balance sheets, and secure new funding.

RMBS, for one, helps banks to manage their exposure to China’s volatile real estate market by offering them an opportunity to repackage the residential loans.

Given the potential benefits of securitisation, the authorities have been actively working on a series of new rules and reforms to help push the market forward.

One of the most important improvements is the launch of a new registration-based system for credit asset securitisation. It means qualified issuers will only be required to register transactions before issuance, as opposed to the previous system where regulators approved transactions on a deal-by-deal basis.

Encouragingly, the Chinese securitisation market is now seeing more demand-driven issuance rather than regulatory-driven issuance.

China Development Bank raised Rmb7.1 billion ($1.1 billion) on March 18 through a credit-backed securitisation product with China’s first subordinated tranche sold in the public market. Previously, all the issuers sold subordinated tranches through a private placement because few local investors would invest in such products.

“The public offering [of the subordinated tranche of CDB’s securitisation] signals the business is becoming more market-based and investors are gaining more knowledge and involvement in the products,” said Niu Nan, a manager of structured finance department at rating agency China Chengxin International. 

More investors are coming into the market in search of yield as the amount of high-yield products in the market declines. China has been easing monetary control and cutting interest rates since 2014, which is weighing on rival financial product yields.

For example, China’s money market funds – including the largest Yuebao, under the aegis of ecommerce giant Alibaba –now offer investors yields of between 4.2% and 4.8%, compared with an average of 6% to 7% in late 2013 and 2014.

By comparison, securitisation products can offer a higher return, with the overall return on mezzanine and equity tranches seen at 7% to 8% and that of senior tranches put at around 4%, according to investment bankers.

“We have seen more types of investors joining to invest in securitisation products,” CICC’s Liu said. Liu noted that Chinese banks usually favour senior tranches, while fund managers like to buy into subordinated tranches, based on their different risk preferences.

As of March 27, the one-year deposit rate was 2.5%, while the one-year national debt yield was 3.15%.

But domestic investors are not the only source of increased demand. Foreign institutional investors are also becoming more interested in China’s securitisation market, partly thanks to China’s long-established Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor schemes. “They get access to the market through channels like QFII or RQFII to seek a higher return than what other fixed-income products have,” Liu said.

It’s a point echoed by Kyson Ho, Asian head of structured finance at HSBC. “With the development of the market and products, foreign investors are getting more familiar and experienced with investments in securitisation products,” he told FinanceAsia.

Potential issuers, meanwhile, are increasingly embracing securitisation as a tool to diversify and manage their asset portfolio.

For banks with massive loans on their books, there is a strong desire to move those loans off the balance sheet. In this way, they are then better able to turn the loans to the asset side and fulfil their lending quotas.

Other issuers include auto-financing companies like Fort Finance and GM Finance, which can securitise their auto loans. Volkswagen Financial Services has tapped the auto-loan securitisation market twice since June. In addition to enlarging its balance sheet, the company is motivated to build up a stable investor base.

“The company can establish a fundraising platform in the largest auto market in the world in this way,” a person close to Volkswagen told FinanceAsia.

More recently, some Chinese company has looked to use collateralised financing such as its offshore account receivable to borrow money, according to John Sun, head of fixed-income, currencies and commodities sales and trading at Citic Securities International.

Many Chinese developers have already pledged their onshore projects to raise funds offshore. However, the private deal signals that offshore assets of mainland companies can also be pledged to investors now.

“It’s a new trend and more issuers may try to securitise their assets with the need to get funds across the border,” Sun said.

A low base

To be sure, the scale of China’s securitisation market remains relatively small.

The outstanding amount of securitisation products in China was $46.4 billion as of end-2014, compared with $10 trillion in the US, $1.77 trillion Europe, $153.3 billion in Japan, according to CICC’s research data.

The market is also much smaller than the country’s inter-bank bond market, which totalled $4.4 trillion in 2014.

China’s securitisation market represents less than 0.5% of the country’s GDP compared with 60%, 22%, and 3.6% in the US, UK, and Japan, respectively.

The market is relatively underdeveloped and needs more participants and services providers, according to analysts and bankers.

For example, in the US, the market has loan-service companies and trustee companies representing the interests of investors. In China, the roles are not as well-defined. Brokers are product structure designers and distributors, while issuers play a combined loan-service company and trustee role.

In addition, despite the authorities’ best efforts to press ahead with reforms, there is still a need for a more comprehensive legal framework in China to provide the market with comprehensive guidance.

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 businesses, leaving some regulatory gaps.

“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 that runs across many industries; the cooperation between regulators and coordination by one single department may be a way out, Ba said in the report.

Source: Wind

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