How to sustain the growth of China’s securitization market

To expand and grow in a sustainable way, China’s securitization market needs enhanced standardization, transparency, a wider investor base and better market liquidity, says recent report

CHINA’S securitization market has grown significantly since 2014, two years after the market was relaunched by the government. However, for the market to continue to expand and evolve in a sustainable way, it will need to develop and improve in a number of crucial areas, according to a Moody’s Investors Service report released on April 13.

These include enhancing standardization and transparency of securitization products and developing a wider base of investors and better market liquidity.

The range of assets securitized in China has increased over time and is continuing to evolve in response to shifts in the real economy and policy direction. In particular, the securitization of consumer finance-related assets has grown rapidly, reflecting China’s increasingly consumption-driven economy.

At the end of 2017, securitization involving residential mortgages, auto loans, credit card debt and consumer loans assets accounted for 29.2% of new issuance and 26.7% of the outstanding balance of securitization notes, compared with 10.7% and 12%, respectively, in 2012.

Meanwhile, the securitization of corporate loans through collateralized loan obligations (CLOs) has declined as a share of the total market, driven in part by a diversification in the types of assets being securitized over time and a moderation in corporate lending growth by banks in more recent years.

CLOs accounted for 8.2% of new issuance and 6.9% of the total outstanding balance at the end of 2017, compared with the peak levels of 66% and 59.3%, respectively, in 2014.

Overall, Moody’s notes, securitization now finances a broad spectrum of the real economy, although on a relatively small scale. The share of funding provided by securitization varies significantly between different asset classes.

For instance, consumer finance asset-backed securities (ABS) funded around 1.22% of China’s total household debt and 1.57% of the total household consumption debt as at the end of 2017. This indicates the share of consumer finance funding provided by securitization in China is low compared to the US and Europe, where securitization financed 55% and 18%, respectively, of the household debt as of September 2017.

In terms of residential mortgage-backed securities (RMBS), the outstanding value of this asset class amounted to 275.9 billion yuan (US$43.93 billion) at the end of 2017, with the sector providing funding amounting to around 1.3% of China’s total residential mortgage debt, or up from 0.02% in 2012.

Securitization finances a small share of the Chinese residential mortgage market compared with the US, where RMBS funded 68% of the total residential mortgage debt as of September 2017, with the majority (61%) contributed by the US government agencies, including Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae).

Auto ABS provided funding amounting to 71% of the total Chinese auto debt at the end of 2016 and Moody’s estimates that this increased to about 10% by the end of 2017 – up from 0.94% in 2012. The auto ABS has become a meaningful funding source for the auto finance sector in China and the share of funding provided by securitization to the sector is comparable to the level in the US, which stood at 13% of the total auto debt as of September 2017.

The value of outstanding Chinese credit card ABS amounted to 118.9 billion yuan at the end of 2017, representing a compound annual growth rate of around 187% since 2014, when the first Chinese credit card ABS was issued. Credit card ABS provided funding amounting to 2.14% of the total credit card debt in China as at the end of 2017, up from 0.21% in 2014.

In addition to the major asset classes, securitization funds a number of newer or emerging types of debt in China, which are often linked to policy direction or prevailing trends in the economy. These include ABS backed by supply chain finance assets, which fund upstream or downstream small and medium-sized enterprises that have limited access to bank lending or the bond market.

Another emerging asset class is the securitization backed by rental housing assets, which provide an alternative funding to developers of rental housing and in turn support the government’s policy of boosting rental housing supply as one of the solutions to soaring property prices.

Also in the list is green ABS, which finances environmentally-sustainable industries and projects as part of the government’s campaign to develop the green financial system in China.