Chinese securitization market continues to grow – S&P Report

Amdist slowdown of the Chinese economy, bulging debt load and excessive investments, the impetus has been on securitisation to convert assets into asset-backed bonds. China’s ABS market has wide range of assets such as loans, real estate, toll ways, auto loans, housing loans etc.

China had initially launched the securitization program in 2005 which was suspended owing to the global financial crisis of 2007-08. It was later revived in 2012 and has had steady growth in the securitisation volumes over the years. An S&P Report on China Securitization Performance Watch[1] dated 31st March, 2017 took account for performance of securitization market in Q1 of 2017.

The Report indicates that new issuance in China’s securitization market grew more than 200% year over year to Chinese renminbi 199 billion (US$29 billion) in the first quarter of 2017. This is more than double the amount in Q1 2016. The growth in the securitization volumes have been despite the increase in yields in the new transactions and favourable support by higher growth in GDP in Q1 2017 to 6.9% on a year-on-year basis.

The growth was largely due to strong issuances in the residential mortgage-backed securities, auto loan transactions, finance lease receivables and new transactions under the securitization scheme managed by China Securities Regulatory Commission.

The RMBS segment is growing for several reasons —  a) there is an active participation by Chinese banks in RMBS transactions,  b) there is growth in income levels in Chinese households coupled with lower leverage levels, allowing better debt servicing ability, this has been demonstrated by lower default rates in RMBS transactions, c) conservative underwriting standards adopted by Chinese banks for long term loans, and d) appreciation in the housing prices in the recent times. These have led to the RMBS market to remain robust in 2017 despite increase interest rates on mortgage loans. Having said that, the RMBS volumes are largely concentric as 80% of the RMBS volumes in Q1 of 2017 have been contributed by a single entity — Bank of China Ltd as per the S&P Report.

The auto loan segment has also had constant momentum which is contributed by captive auto loan finance companies that have been relying on securitization as a constant source of funding.

The collateralised loan obligation issuances have also seen better performance in Q1 2017 despite the slowdown of the economy.

While there has been a stable increase in the securitization volumes there has been instance of default reported in securitization in the recent times. Despite the odds the Report has indicated that the securitization volumes will remain stable in China during the year and the government seemingly is also dedicated to giving securitization significant push in the coming year.


[1] https://www.spratings.com/documents/20184/0/170616_China+Securitization_Aaron/c5029a9f-423f-4baf-9c32-236f45b7ffb1

by Nidhi Bothra (finserv@vinodkothari.com)

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