Is securitisation the magic wand to rebalance Chinese economy?
China is tapping into asset and mortgage-backed securities to reset its economic pulse
When many things seem to be stalling in China, be it state sector reform or raising funds through the stock market, a new breed of securities that gained notoriety in the developed world in the last financial crisis is undergoing rapid expansion with a goal to facilitate the rebalancing of the mainland’s economic structure.
Securitisation products, made from pooling certain assets such as loans and mortgages and repackaging them into interest-bearing securities, have been at the heart of China’s bond market reform. In principle, any income-producing asset can be securitised and sold to investors, from loans and mortgages to receivables and lease payments.
“The impressive growth momentum in China’s securitisation market has been underpinned by the overall expansion of the bond market, which has exceeded 40 trillion yuan and ranks the third-largest in the world,” said Tailei Wan, head of financial innovation and international cooperation departments at the National Association of Financial Market Institutional Investors (NAFMII), a self-regulatory body under the People’s Bank of China.
“Chinese banks and corporates, to be frank, have been very much leveraged over the past year, which gave rise to the demand of securitisation that can mobilise existing assets without adding to the leverage,” Wan said at the structured finance conference last week put on by the Asia Securities Industry & Financial Markets Association.
Beginning in the 1970s, securitisation was at the heart of the 2008 US subprime mortgage crisis that nearly cratered the world economy. Given the havoc it wreaked on markets and households in the developing world, China banned securitisation in 2009 and only reopened it in 2012.
But the market didn’t take off until a year ago, when authorities simplified issuing rules from a deal-by-deal approval to a registration-based system. Market volume more than quintupled from under 100 billion two years ago to more than 500 billion at present. Underlying assets diversified from corporate loans to consumer credit, auto loans and residential mortgages.
The benefits of securitisation are manifold. The first step to securitising is to bundle assets and sell them to a special purpose vehicle that bears no recourse to the asset’s originator. Such a process also enabled independent credit ratings given on the merits of the securitised portfolio, rather then being weighed down by the original asset holder. Finally, when securities are sliced into tranches to investors according to payment seniorities and yields, credit risks are also spread out.
In a nutshell, securitisation opens up a benign circle in which banks’ balance sheets are freed up, borrowing costs are lowered, new sources of funding arise, credit risks are diffused, all of which were factors that fuelled its acceleration in the developed markets in the first place, wrote Andreas Jobst, an economist at the International Monetary Fund.
In China, a mature and deep securitisation market will lend a much needed hand to galvanise savers to spend more, and to plug financing gaps trapping small and medium enterprises. It has even assisted China’s urbanisation push, as shown in the issuance in July of 10 billion yuan China Development Bank shanty town renovation loans.
“The goal of securitisation in China, first and foremost, is to service the needs of the real economy, especially in fields overlooked by traditional bank lending,” Wan said.
If the market can grow steadily, it will also help open up China’s bond market, said ratings agency Moody’s. “It is more likely that international investors will consider a new market if they are certain that there will be continuous issuance in the market.
More active issuance means more investment opportunities, which in turn will bring down the overall cost for investors to set up in the new market,” Moody’s said in its report.