Asset securitization in China

Written by Victor Fan || September 13 2013

China initiated its asset securitization program in 2005 for securities companies. However, after the subprime mortgage crisis swept over the globe, regulators in China temporarily stopped the program because although it provides liquidity to markets, securitization also comes with significant risks. In 2012, the asset securitization program was initiated once again with permission from the state council and the China Securities Regulatory Commission (CSRC). Regulations were changed to allow for more types of asset securitization and the threshold for securities companies to enter was lowered. The following report provides a summary regarding the participants, regulations and current conditions within China’s asset securitization markets.

Main parties of the asset securitization:

Originator: These are the asset owners, usually financial institutions such as commercial banks along with insurance and securities companies. Because originators need financing, they seek to securitize less liquid assets, which have more predictable and stable future cash flows than liquid money. The originators will entrust special purpose vehicles (SPV) in order to pool the assets and securitize them.

Requirements for the asset: According to the CSRC’s regulations, property or property rights that generate predictable and stable future cash flows include accounts receivable, credit assets, rights to benefit from infrastructure, commercial properties along with many others.

SPV/Trustee: Special purpose vehicles mainly accept or buy assets from the originators before packaging them into an ‘asset pool’ which consists of a variety of different assets. Eventually, the SPV issues securities for the ‘asset pool’ and find investors interested in purchasing them. Currently in China, SPVs are generally trust companies.

Investor: Theses are institutions and individuals who purchase the pooled securities from the SPV.

The process of asset securitization in China:

In China, the trust funds/companies are the SPVs/trustees for the asset securitization process. Simply put, the originators package the assets, which then must be securitized in order to become a trust product. Then, the trusts take into account all future cash flows from the assets before going through a rating process by credit rating institutions. At this point credit enhancement processes may also be required. After that, trust funds securitize the ‘asset pool’ and the shares are sold to investors. The asset’s principal and interest are paid to shareholders through asset preservation, capital registration and settlement institutions.

Classifications of assets for securitization and China’s current situation

There are four main types of securitized assets:

  1. Tangible and intangible assets
  2. Credit assets
  3. Securities
  4. Cash

Currently credit assets represent a major part of asset securitization in China. Recently intangible asset securitization including the securitization of patents has become more popular but relative to credit assets, this still remains small.

Regulations and regulators

The ‘Provisions on the Administration of Securities Companies’ Asset Securitization Businesses’ enacted by the CSRC on March 15, 2013 represents the main regulation for the securitization process. The primary regulators for asset securitization are the CSRC, People’s Bank of China (PBOC), China Banking Regulatory Commission (CBRC) and China Insurance Regulatory Commission (CIRC). The PBOC and CBRC are primarily responsible for credit asset securitization because these are most related to banking. The CSRC is responsible for supervising the securities and the CIRC is responsible for all aspects relating to the insurance industry.

Opportunities

According to a news report from China Securities Newspaper, the on-hand balance of securitized Chinese credit assets was CNY 26.79bn in 2012, which represented only 0.02% of the total assets in the banking industry and 0.1% of the total on-hand balance of bonds. Furthermore, this represented only 0.05% of China’s GDP. If the on-hand balance of securitized credit assets reaches 1% of China’s total bank assets, the amount in CNY would reach over 1tn. Recent research shows that the state council has urged for the development of more specific rules for asset securitization, which they claim should be updated on a more regular basis.  This implies that the government is attempting to speed up the maturity of the asset securitization process in order to solve liquidity problems within the market.

Problems

There are also a number of problems related to asset securitization. The most common critique regards the low asset securitization quotas for banks. The current total bank quota is at CNY 50bn, which is not enough to meet large demands in the Chinese market. China Development Bank received the largest quota at CNY 10bn. Other commercial banks only require CNY 3bn each, which is strikingly low compared to the value of their total assets.  Thus, the liquidity of the asset-backed securities continues to be significantly restrained.  Moreover, smaller banks more desperate for cash have higher demands for asset securitization than state-owned banks, but do not qualify to meet the quotas.

More importantly, the number of investors for each type of asset-backed security is limited as low as 200. Additionally, no public offer of the asset-backed securities is permitted, which means that sales remain private. These restrictions have made it increasingly difficult for interested and suitable investors to participate in purchasing the securities.

Ways to solve the current dilemma for asset securitization

Some experts argue for three ways that would better manage issues regarding the current process of asset securitization. First, quotas should be completely eliminated, providing no limits on the securitized assets. Second, the assets should circulate and transact throughout the market and certain exchange channels should be opened. Lastly, block and package transfers should be allowed. Applying all three points would provide a basis for executing further steps in order to better the process of asset securitization.