RPT-Fitch: China's Securitisation Reforms Have a Long Way to Go
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Sept 6 (Reuters) - (The following statement was released by the rating agency)
China's State Council announced several measures last week, which could signal an intensifying commitment to developing its securitisation market, says Fitch Ratings. These include steps to boost market liquidity, broaden the investor base, and enhance regulatory and risk controls.
However, Fitch feels that rapid development will remain inhibited in the short term. This is for three crucial reasons.
First, the market remains structurally fragmented by the existence of two securitisation frameworks in China - the Credit Asset Securitization (CAS) scheme and the Specific Asset Management Plan (SAMP) - which are governed by different regulatory authorities. Furthermore, the authorities apply different guidelines on the two frameworks with respect to eligible originators, underlying assets, and the investor base.
Second, legal enforceability and bankruptcy-remoteness in SAMP transactions remain unclear. This stems from an absence of comprehensive rules on the transfer of asset title for various (underlying) asset types under the SAMP framework.
Third, the government remains cautious about the pace of development of the securitisation market. This is because the authorities would like to see the market develop at a steady pace while still retaining control over the risks of securitisation.
The recently announced measures are still significant. Notably, the proposal to allow securitised products to be traded on stock exchanges would boost liquidity. It would not only facilitate a real-time market-based pricing of these products, but also raise the number of investors and provide a wider selection of investment options.
Moreover, the proposal to limit stock exchange-traded securitisation notes to "high quality" assets would facilitate a relatively stable portfolio performance. Thereby, it would also potentially enhance funding options for participating banks (originators of the underlying assets), and provide at least an incremental benefit to balance-sheet flexibility.
Finally, the State Council's intention to strengthen control over the securitisation market makes sense in that it would enhance oversight of related authorities, improve current laws and regulations, as well as standardise and tighten product guidelines. In turn, these should support investors' confidence in - and the overall liquidity of - the securitisation market.
What these measures will not do is facilitate any meaningful risk transfer from the banking system. Unless quotas are lifted dramatically, the small size of China's securitisation market (less than 0.1% of total assets) means any attempt at "cleaning up" the country's banks by a large-scale transfer of NPLs could be problematic - given problems with pricing such assets and the potential for overwhelming what is a fledgling market.
Fitch does not currently rate any securitised debt in China. The agency feels that the recent statements from the State Council, while lacking greater detail, are of considerable significance. However, this does not go far enough to radically alter the size or structure of the securitisation market - nor does it carry any huge near-term implications for China's overall financial system.
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