China's asset-backed securities market expands despite worries

Beijing is expected to allow mainland banks to sell billions of yuan in asset-backed securities (ABS) soon, adding to concerns about increased leverage in the economy.

Up to 300 billion yuan (HK$380 billion) of ABS will be issued by mainland banks in the near future, bankers say, as the central government encourages lenders to finance new projects with funds from sales of loan-backed securities.

The launch of a large-scale ABS programme could beef up leverage in the financial system, which has been escalating at a rapid pace since 17.5 trillion yuan was pumped into the economy in 2009 and 2010, an amount equivalent to 24 per cent of the GDP of those two years. Lax risk controls could lead to a financial crisis, just as toxic ABS triggered the United States subprime crisis, economists have warned.

Fitch Ratings said that unless ABS quotas were lifted dramatically, the small size of China's securitisation market - less than 0.1 per cent of banks' total assets - meant any attempt to clean up the country's banks by a large-scale transfer of bad loans could be "problematic".

Premier Li Keqiang said at a State Council meeting last month the government would expand the ABS programme, after it approved the sale of 50 billion yuan of ABS last year and 22.85 billion yuan in 2011 in a pilot scheme.

The likely sharp increase in the ABS quota this year underlined the determination of the government to promote securitisation - which helps ease pressure on banks' capital adequacy ratio and transfers credit risk - UBS Securities said in a report.