Finding opportunities in China’s ABS market
2019/05/07 14:15:37
10,000+
Asset securitization market in China continued to enjoy growth last year. When China started their crackdown on shadow banking, many companies struggled to raise capital through conventional finance. This led to many companies adopting ABS as preferred source of finance during the China’s official deleveraging campaign. Subsequently, China’s ABS market has exploded over the past few years.
Credit & Corporate asset securitization
Currently, credit asset securitization and corporate model securitization are two popular categories in China.
|
|
Credit Asset Securitization |
Corporate Asset Securitization |
|
Regulatory oversight |
People’s Bank of China (PBOC), China Banking Regulatory Commission (CBRC) |
China Securities Regulatory Commission (CSRC) |
|
Trading marketplace |
China interbank market |
Shanghai and Shenzhen stock exchanges |
|
Originators |
Banks, Financial Institutions |
General industrial, Commercial enterprises |
|
Special Purpose Vehicle (SPV) |
Trust company |
Asset-backed specific plan (ABSP) of securities company, Subsidiary of fund company |
|
Underlying assets |
Personal housing mortgage loans, enterprise loans, car loans |
Accounts receivable, financial leasing claims, small loans claims, property income, charge rights |
Source: China Knowledge Databank, Chinese Business Law Journal
Chinese's goal of deleveraging led to boom in ABS market
In 2018, the scale of China's asset securitization market totaled RMB 2.01 trillion. This presents an increase of 36% over the previous year and the market inventory surpassing RMB 3.09 trillion, an increase of 47% over the previous year. According to Asia Securities Industry & Financial Markets Association, China is the second-largest issuer globally in 2017.
Relatively young credit market
According to Moody’s Investors Service, the Chinese ABS market is relatively young compared with United States. China lacks the long track record on deal performance during economic crises or data on how ABS structures are implemented in distressed situations.
"Because of a longer history, the US ABS market also has a more diverse pool of investors and a deeper and more liquid secondary market," said Jerome Cheng, senior vice-president at Moody's.
With its historical track record, the US market provides investors a "good reference point on not only the volatility of the asset performance but also the implementation of the transaction structure in a distressed situation", he said.
International investors pouring interest in attractive ABS market
According to Wang Hongbin, CEO of China at Euromoney Institutional Foreign investors, foreign investors have great interest in Chinese ABS market and eager to access this maturing credit market. However, they might feel “strapped” because it’s hard to fully understand the fundamentals of issuers and regulators’ roadmap to implement the opening.
Many foreign investors are eager to participate in the Chinese ABS market as China opens up its financial sector. Interested investors are hoping for more communication with Chinese top regulators to exchange views.
However, industrial experts are hoping for more brokers in the ABS markets to boost liquidity, thereby attracting additional investors. Tracy Chen, Head of Structured Credit at Brandywine Global suggests that good liquidity, simple transparent and straightforward deal structure, as well as data transparency will raise foreign investors’ confidence on Chinese ABS market.
Meanwhile, Managing Director at Association for Financial Markets in Europe, Richard Hopkin suggests that information disclosure is a key element that China should adopt from more mature markets.
Nowadays, Bond Connect, China Interbank Bond Market and QFII are three major platforms for foreign investors to access China’s ABS market.
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