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Car-loan-backed security wins approval

Tom Miller

Regulator seeks to promote innovation in capital markets despite subprime concerns

The mainland has approved the first securities product to be backed by car loans, a sign that Beijing is pressing ahead with developing an asset-backed securities market despite lingering fears about the impact of the subprime mortgage crisis.

GMAC-SAIC Automotive Finance, the car financing arm of General Motors Corp's joint venture with Shanghai Automotive Industry Corp (Group), will launch the new securities jointly with Fortune Trust & Investment, a financial subsidiary of Baosteel Group.

Although car loans in the mainland have a history of going bad, the decision would help stimulate financial innovation in the mainland's capital markets, the Shanghai branch of the China Banking Regulatory Commission said in a statement.

The reputation of asset-backed securities has taken a battering since financial products backed by subprime mortgage loans blew up in investors' faces this summer. But mainland regulators remain convinced that more sophisticated products are needed to spread financial risk.

The CBRC launched a pilot batch of new securities in 2005, allowing the China Development Bank to issue collateralised loan obligations (CLOs) and China Construction Bank Corp to sell residential mortgage-backed securities.

GMAC-SAICAF's car loan-backed security was the first of a new pilot project which should see mainland banks issue more than 10 CLOs, said Jet Zhou, a structured finance analyst at Fitch Ratings in Beijing. The total quota will be about 60 billion yuan.

'For the moment, I think the subprime adventure has little influence on China's securitisation market. These are just preliminary pilot projects and carry little financial risk,' Mr Zhou said.

Although car-finance companies still lack the ability to check customers' credit history, they have proved far more adept at making loans than mainland banks and insurance companies, which largely withdrew from the business in 2004.

'The car loans market has huge potential, especially as the credit checking system improves. We should see a booming car loans market within the next five to 10 years,' said Yale Zhang, a director of Greater China vehicle forecasts at CSM Worldwide.

Just 10 to 15 per cent of new cars on the mainland are bought with loans, compared with about 70 per cent in developed markets. This figure was higher in 2003 until a regulatory crackdown following a spate of bad loans.

GMAC-SAICAF, the first car-finance firm to enter the new-look market, directs most of its lending through car dealerships rather than to individual customers, which has helped prevent loans from going bad.

'Companies such as GM and Volkswagen have been in China a long time. They really know the market and they do business very cautiously,' said Mr Zhang.

Nevertheless, outstanding loans at GMAC-SAIC topped 10 billion yuan at the end of last month, according to the CBRC statement.

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