China's securitisation push brings mixed blessings
While the instrument gives companies another channel to access funds, investors are put at risk
It is as if the mainland never heard of the global financial crisis. Regulators in that market are embracing securitisation – the type of structured debt that took global banking to the brink of collapse in 2008-09 – with the zeal of the newly initiated.
This is coming from the top.
“Premier Li Keqiang and People’s Bank of China governor Zhou Xiaochuan have said repeatedly they would like to see the development of securitisation,” said Jerome Cheng, a senior vice-president for Moody’s Investors Service’s structured finance group.
The data speaks for itself. There has been more securitisation issued on the mainland in the year to date than in the previous eight years combined, according to Thomson Reuters.
Mainland regulators only opened the domestic market in 2005. The market shut down in 2008 during the global financial crisis and reopened in 2012. But the deal flow in 2014 dwarfs anything done before and it shows this is becoming a serious funding arena in the country.
Analysts said this was part of Beijing’s drive to bring more discipline to bank lending. Collateralised loan obligations were the most common form of securitisation, Standard & Poor’s research showed, making up about 80 per cent.
As the instrument takes off, banks will become more sensitive to the real market price of their loans, and adjust their lending policies and interest charges accordingly.
S&P credit analyst Vera Chaplin said the government was promoting securitisation as an alternative to shadow banking. As banks are able to offload loans through their sales in the securitisation market, they will be able to free up money for lending to medium-sized private enterprises that previously relied on trust loans or the like.
In July 2013, e-commerce giant Alibaba Group launched the mainland’s first securitisation of small and medium-sized enterprise loans and raised three billion yuan (HK$3.8 billion). The firm is pioneering the use of internet-based lending.
“Securitisation … increases the channels of fundraising,” said Chaplin.
Car-loan securitisation is the other big driver. Typically, these are initiated by the onshore financing arm of international car firms operating on the mainland. Securitisation lets them offload loans to institutional investors, freeing up more cash for car-loan financing.
So far, there had been 17.1 billion yuan of car-loan securitisation in the country, Fitch Ratings said, almost all of it this year.
Volkswagen this month backed the first internationally rated car securitisation originated on the mainland – an indication that this market was internationalising, which is significant, given that there has been no cross-border car securitisation from the mainland.
But there are questions about using this instrument on the mainland. The main area of uncertainty involves the mainland’s sketchy bankruptcy laws and investors’ ability to reclaim capital in the event of defaults. This is particularly tricky with securitisation because the structuring distances investors from the assets against which they lend.
The other issue is that the mainland has gone through decades of boom, meaning investors have no data on which to model a worst-case scenario. “China has … been in high-growth mode since the ’90s. There is no historical precedent for real economic distress on which to base models,” said Cheng.
