Consumer-related issuers set to lead asset-backed securities growth
Market rockets to 1.6tr yuan as firms are thirsty for finance while government is keen to cut debt levels
China’s asset-backed securities (ABS) market has rocketed to 1.6 trillion yuan (HK$1.79 trillion) from 60.2 billion yuan in 2013 after the government gave a go-ahead to the structured finance tool in 2012, thanks to corporates’ demand for financing and government efforts to cut debt.
Analysts expect the growth to continue, led by the increase of consumer-related ABS amid China’s economic transition.
“As long as there is not a big surge of interest rates [in China], ABS market will continue to grow,” Industrial Bank in Shanghai chief economist Lu Zhengwei said, adding that the explosive growth of ABS echoes China’s effort to reduce leverage in the real economy.
An ABS is a bond-like product comprising assets such as corporate loans, income receivables, leases or infrastructure charges. Credit rating focuses more on the assets rather than the issuers. High interest rates push up the cost of issuing an ABS.
By December 19 there were 784 ABS products already issued in the mainland market, according to data from Wind Information. Accumulative issuance reached 1.6 trillion yuan from 920.3 billion yuan at the end of last year and 375.3 billion yuan by the end of 2014.
At the end of 2013 there were only 29 ABS products in the market with a total issuance of 60.2 billion yuan.
In the first half of this year, China has surpassed the United States as the world’s second-largest securitisation market by new issuance volume, behind Japan, according to data from rating agency Standard & Poor’s.
The exponential surge came after China resumed the experimental programme for ABS in May 2012.
The country’s first experimental ABS was launched by China Development Bank in 2005, backed by commercial loans. But the whole pilot scheme was suspended in 2009 as the collapse of complicated financial products based on subprime loans in the United States triggered a global financial crisis.
Fitch Ratings structured finance director Hilary Tan said the quick growth of China’s ABS market was the result of the combination of regulatory support, originators’ demand for funding and for diversifying their financing channels, especially the non-bank financial companies such as vehicle finance firms.
So far, China’s corporate-loan-backed ABS made up most of the overall domestic ABS market. The 140 issued products raised an aggregate 603.3 billion yuan, accounting for 38 per cent of total issuance. This was followed by 10 per cent each for residential mortgage backed securities (RMBS) and lease ABS.
ABS are divided into two subsystems in China. The Asset-Backed Specific Plan (ABSP) is regulated by China Securities Regulatory Commission, while the Credit Asset Securitisation (CAS) scheme is governed by People’s Bank of China and China Banking Regulatory Commission for interbank issuance.
Tan expected growth to be sustained next year despite a slower pace of growth in car ABS and residential mortgage backed securitisation.
“Under the CAS scheme, in 2016 so far we have seen consumer related assets, such as consumer loans, credit cards, auto [car] loans and residential mortgages overtake corporate loans as the main asset classes for securitisation. We believe this trend will continue into 2017,” Tan said.
This is consistent with the government’s goal to rebalance to a consumption-led economy from an investment-led one, she said.
In contrast to the ABS backed by subprime loans in the US, China’s ABS products so far have mostly been backed by assets with good quality and stable cash flow.
“If you compare the residential products that are being offered in China banks, there is no such product offering equivalent to that of a subprime loan in the US,” Tan said.
“The loans in China are available to borrowers with no delinquency history and borrowers will have incomes verified. It is not feasible to draw a parallel between the two markets,” Tan said.
Lu from Industrial Bank said regulators had set more stringent requirements on structural financing products since the subprime loan crisis but more work needed to be done to develop China’s ABS market.
“Currently ABS is at an experimental stage. It is not totally compatible with the property law or the laws at the higher levels,” Lu said.
S&P analysts said in a research report that regulatory clarifications could be a deciding factor for whether the market could sustain itself and attract more players, and whether the products eventually could become useful tools to satisfy multiple policy roles.
Tan pointed out two risks. ABS allowed easy access to credit, which may suggest loosening of underwriting standards. A general drastic downturn of the economic environment in China would also hurt the ABS market, although such scenario was unlikely.