State of Market : by Nidhi Bothra

Updates on 4 August, 2009:

It was after the Asian financial crisis in 1997 that several countries with non-performing loans to deal with saw the best way of disposing them was by securitisation. So while other countries brought in their regulatory frameworks to incorporate this mode of financing, China only thought of it in 2005. The People’s Bank of China (PBOC) and China Banking Regulatory Commission (CBRC) jointly issued the Administration Measures for Securitisation of Credit Assets on a Pilot Basis (Administration for Pilot Projects for Securitisation, APPS). China began the first spurt of securitization in 1996 the Zhuhai Highway Tolls’ receivables being securitized. It was only in 2005 China construction bank and China development bank won approval to securitise assets and the first mortgage backed securitization and asset backed securitization deals respectively were carried out. Everything went quiet after that and it seemed more of an experimental exercise and was a false dawn.

The Measures did not talk about hedging for securitisation transactions and did not address tax or accounting issues. These issues have been dealt with in the supplementary measures published after the pilot measure was introduced. “Credit Assets” were not clearly defined. There were legal restrictions on forming thinly capitalized companies – special purpose vehicles issuing bonds. Also the bankruptcy laws and the trust laws were new and the regulatory issues time taking and procedural. However the question of true sale was well addressed and clearly recognized that the credit assets transferred to the trustees were trust property and not assets of the sponsor. There is a certain peculiarity in the pilot scheme where if the trust did not comply with the standards and scope as stated in the contract, the sponsor will buy-back or replace the assets.

The law leaves several lacunae, for perfecting the assignment of receivables in China, the Contract Law states that individual notice to be given to the debtor, whereas the pilot measure states that a public notice would be considered sufficient for perfection of the assignment. The Measures do not make it clear whether in case of transfer of receivables relating to mortgages require re-registration or not. Stamp Duty issues have not been addressed either.

The Administrative Measures of 2005 were definitely a positive sign of development of securitization in China, but the rules apply to securitization of assets originated by the Chinese commercial banks, but for securitization to flourish there was a need of full fledged statute governing all types of assets and originators.

Securitisation has been used in a very limited way to securitize the non performing loan portfolios of the state owned banks (Bloomberg – Corporate Law Journal, 2006). In 2007 several domestic banks and asset management companies were given a nod in lieu of developing securitization in the country, CBRC came out with a circular in 2008 to replace the pilot scheme with a new set of approval measures, this would not only regularize the procedure but also facilitate the development of securitization market; a very hopeful move for the Chinese securitization market. The turmoil in the US markets have surely dampened the growth prospects but there is surgence of demand both from the issuers and investors side.

The Administrative guidelines of April 2005

by Vinod Kothari

After several years of waiting, the Chinese central bank, People’s Bank of China, took initiative to draft what is called the guidelines for Pilot Projects on securitisation. These guidelines were promulgated in April 2005. Full text of the guidelines is available on our Securitisation Laws page.

The broad tenor the guidelines is very simple and very permissive. It seeks to lay down the regulatory framework in a very easy manner -with lot of flexibility. The directions are a complete code by itself and lay down almost everything required – investors” rights, reporting by trustees, information documents, etc. The simplicity and pragmatism of the guidelines is very very appreciable.

Form of the special purpose entity:

It is clear from the guidelines that special purpose vehicles will be formulated as trusts. China had recently adopted a trust law also – the broad concept of a special purpose trust will be similar to what is understood in other jurisdictions. Full text of the Chinese trust law is here.

The law leaves the trust deed to provide for the basic rights of investors, originator and other parties.

The manner of transfer of assets to the trust is by way of “undertaking a trust” – same as the English concept of declaration and acceptance of trust. By virtue of trust declaration, those assets will be demarkated from other assets of the trustor or the trustee. The law provides a clear bankruptcy remoteness – that the assets transferred into such trust will not be affected by the bankruptcy of the trustee, originator, administrator or other service providers.

Most interestingly, there is also a ring fencing mechanism inherent in Article 7 – it provides that claims and liabilities arising on acocunt of one trust shall not be commingled with the claims or liabilities of other trusts. This means, effectively, there may be one trust entity that might take care of several securitisation transactions.

Who can be trustees for special purpose vehicles – article 16 provides that investment and trust companies registered with the CBRC can act as trustees.


The originators of credit assets for asset backed securities will be financial institutions. From this, it seems other entities, for example, corporates, will not fall under the current guidelines. Under Chinese context, this may be treated either as a prohibition on securitisation by other originators, or simply limitation to the scope of the present guidelines.

A very unclear statement appears in Article 12 – it says the originator will publish in national media the fact of securitisation and thereby inform the relevant rights holders. It is not sure whether the Chinese regulators are trying to draw a leaf from the Italian law no 130. In Italy, a securitisation transactions needs to be registered with a public registry, which serves as a public notification device. Thereby, the need to notify the obligors is avoided. But this purpose, obviosly, cannot be met by a national media publication. It cannot be implied that the obligors would be named in the publication in question. The intent of this clause remains very queer.

China Banking Regulatory Commission:

The overall supervision of securitisation transactions will be with the China Banking Regulatory Commission. The guidelines also provide that detailed rules on securitisation shall be framed by the Commission.

Trading in asset backed securities

Asset backed securities will be traded in the National Inter-bank Bond market. Detailed rules for trading and information requirements have been laid out in article 32 onwards.

Credit rating is mandatory by article 35.

Loan servicers

Detailed functions and duties of the servicers have also been laid down in the directions. These are mostly what the servicers have to do anyway in real life securitisation transactions.

However, one of the peculiar requirements comes from Article 24 which provides that the servicer will keep a specialised business department to separately manage the securitised assets. That the securitised assets should not be commingled is understandable – but keeping a separate and specialised department is neither logistically required nor desirable. It adds unwarranted costs to the transaction.

Previous updates

Updates: 27th June, 2000: Important updates about securitisation law in China were made.

Added on 17th January, 2000/ 8th Nov. 2000– Australian bank Macquarie has tied up with China Construction bank for the latter’s proposal to securitise – click here for a news item. For another related item, click here.

Added on 23rd July, ’99: China is soon going to launch its first mortgage securitisation deal with China Construction Bank originated loans being securitised by an Australian bank – see ourSecuritisation News page.

State of the Market:

Securitisation has been slow to catch up in the People’s Republic of China, primarily due to the inefficiencies of the legal system, lack of standardised tax rules, and more significantly, the absence of organised mortgage lenders or credit card issuers. The focus of market activity has essentially been towards future flows receivables. Balbir Bidra of Wilde Sapte refers to the following significant securitisation deals in China:

  • 1996, China’s Zhuhai highway securitisation of future flows;
  • 1996-98 various securitisations of receivables from bridges, toll roads, tunnels and power generation;
  • September 1997, securitisation of future flow receivables involving the state-owned shipping company, China Ocean Shipping (Group) Co (Cosco)
  • 1998, establishment of a mortgage-backed securities programme by the Shanghai Housing Authority, involving a central agency as both mortgage broker and guarantor.
  • January 1999, the PRC prepared to launch its first asset-backed deal, a domestic issue involving a conduit programme issuing US$100m of securities backed by trade receivables purchased from five state-owned enterprises situated in Chongqing including Chongqing Special Steel; and
  • February 1999, China Construction Bank, one of the mainland’s largest state banks, established its asset management company to repackage distressed debt.

Legal initiatives to promote securitisation:

One of the major roadblocks to securitisation in China has been the customary legal system, not in line with the laws prevailing in the Western world. Under PRC laws, assignment of receivables requires not only the notification to the obligor, but also the obligor’s consent. Equitable assignments are not recognised in law. Not only this, structuring of the SPVs poses another legal difficulty. To quote Balbir Bindra: “SPVs face two further major obstacles. Firstly, the concept of a trust is not recognised under PRC law which impacts on both ‘bankruptcy remote’ and security issues. Second, the impractical requirements in the PRC for the issuance of debt securities militates against the use of a domestic SPV”.

However, Chinese contract law was amended with effect from October 1, 1999. The amended law does not any more insist on the obligor’s consent to an assignment or sale of receivable. But the Contract Law still requires that notification to the obligor.

A trust law has also been enacted in China in Oct 2001.

The next big issue, in a country traditionally held under tight controls, is the need to seek approvals at every stage of the transaction. “Validation of any securitisation structure involves a Byzantine process of obtaining consents and approvals from a panoply of government bodies including the State Administration of Foreign Exchange (SAFE), the State Planning Commission, the Ministry of Finance, the Ministry of Foreign Trade and Economic Cooperation and the People’s Bank of China. Moreover, if the originator is state-owned, any sale of assets to an SPV established outside the PRC will require the approval from its governing authority or the State Asset Administration Bureau”, says Balbir Bindra..

Taxation of securitisation:

Withholding tax is applicable on interest payments to non-resident SPVs. Further, the income of the SPV is taxable based on enterprise tax concept.