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CHINA MONEY-ABS market set to explode as Beijing activates idle assets
April 22, 2015 / 6:17 AM / 3 years ago

CHINA MONEY-ABS market set to explode as Beijing activates idle assets

SHANGHAI, April 22 (Reuters) - Issuance of Chinese asset-backed securities (ABS) could triple to more than $160 billion this year, reactivating huge assets now mouldering on bank books, as Beijing streamlines procedures for firms to securitise receivables.

By making it easier for banks to repackage and resell receivables - such as loan repayments on mortgages, car loans and credit cards - the government hopes to free up banks’ balance sheets so they can lend more to the real economy.

The People’s Bank of China (PBOC) announced this month that regulatory approval will no longer be required to issue ABS, and issuers will now only need to register to do so.

Getting banks to lend more is a major policy goal, given banks have so far been reluctant to lend despite repeated exhortations from top officials. Even Premier Li Keqiang has called for banks to “activate existing assets,” - which is where this securitisation push comes in.

For example, a bank can take a portfolio of 5-year loans sitting on its books, chop them up into tranches, and sell them in chunks to other institutional investors who then receive the interest payments made by the borrower.

The logic is simple. China’s tiny securitisation market has not tracked the expansion of China’s $10-plus trillion economy, and banks alone have assets worth $28 trillion on their books.

By encouraging banks to securitise these assets, Beijing can reduce the need to print money to prop up the money supply and keep downward pressure on real interest rates.

Market players now expect ABS issuance to more than triple to 1 trillion yuan ($161 billion) this year, up from 300 billion yuan in 2014, which was in turn twice the total issued since 2005.

“There is a huge demand from banks alone to securitise assets,” said Zhao Hao, economist at ANZ in Shanghai.

“General demand can easily push issuance value exceeding 1 trillion yuan ($161 billion) this year.”

But Zhao said that the quality of the assets being securitised was more important than the process of securitisation itself.

Abuse of the ABS market was a primary reason for the global financial crisis in which American banks securitised low-quality sub-prime mortgages, repackaged them into opaque hybrid products, and then sold them at yield too low to reflect the actual risk.

In China, mortgages are also expected to be a major component of ABS issues but most Chinese mortgages are good quality because the average Chinese mortgage holder is not heavily indebted.

“ABS based on banks’ mortgages will be a good sale that we will be very much interested in,” said a trader at a Chinese insurance company in Beijing.

“But proper pricing is a key issue as China is faced with fledging, and thus inadequate, mechanisms to rate the underlying assets.”

Banks, automakers, property developers and securities brokerages are among those expected to issue ABS, with banks seen continuing to be the biggest issuers.

This is because banks have the largest pool of assets and because they need more capital now to meet the stricter capital requirements required under the BASEL III capital accord.

NO BAILOUT

Issuance from automakers is also expected to grow quickly with ratings agency Fitch forecasting that the auto ABS sector in China will grow significantly in the next few years. ID:nFit723721]

Insurers, pension funds, other long-term investors and banks are expected to be the primary buyers of asset-backed securities, traders say.

While many of these investors are state-owned or controlled, the market does not view this as a quasi-bailout because the assets being securitised are high quality, hence there is no need for a bailout.

For now, only a small number of foreign institutions are qualified to trade ABS on the Shanghai-based interbank market, but Beijing is expected to improve access to the market.

“With proper expertise, overseas investors will definitely become ideal traders of China’s ABS products once regulations are eased in the future,” said ANZ’s Zhao.

Reporting by Lu Jianxin and Pete Sweeney; Editing by Nachum Kaplan and Eric Meijer

Our Standards:The Thomson Reuters Trust Principles.
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