The rise of China's securitization market

• Published date: 01 December 2017
• Author: Ya Tang,Jianguo Xu,Jing Chen,Daixi Chen
• Date: 01 December 2017
• DOI: http://doi.org/10.1111/fmii.12090

DOI: 10.1111/fmii.12090

ORIGINAL ARTICLE

The rise of China's securitization market

Ya Tang Daixi Chen Jing Chen Jianguo Xu∗

Correspondence

JianguoXu, National School of Development

andInstitute of Digital Finance,

PekingUniversity, Beijing, China, 100871.

Email:jgxu@nsd.pku.edu.cn

∗Allauthors are affiliated with Peking University.

Abstract

We study the development of asset securitization markets in China.

We manually collect all asset securitization projects and securi-

ties data from 2005 to 2015. Inspection of this sample combined

with related policy changes reveals distinct characteristicsand some

potential problems. At the macro level,asset securitization market in

China is policy driven, regulation-segmented, and highly illiquid. At

the micro level, the underlying assets are mainly corporate loans or

assets, rather than mortgage or consumption loans as in the US and

European markets. State owned commercial banks and enterprises

enjoy significantly lower interest rates when issuing securitization

bonds. Finally,risk-isolation and credit enhancing techniques signifi-

cantly improve the ratingof asset-backed securities.

KEYWORDS

Asset Securitization, Credit Rating, Liquidity, Underlying Asset

JEL CODES:

G20, G21, G32

1INTRODUCTION

After9 yearsof slow development, China's asset securitization markets grow explosively in 2014 and 2015. Asset secu-

ritization is not only important for its own sake but also because it possibly opens the door for corporatebond markets

development, which is currently the weakest link in China's financial system. If China can develop a large corporate

bond market, the economic landscape may change accordingly. At the policy side, the third plenary meeting of the

18th China Communist Party Central Committee decided that China should develop multi-layercapital markets. The

decision explicitly posed that China should developthe bond market and enlarge the proportion of direct finance. It is

plausible that corporate bond market may experiencerapid development in the near future. Asset securitization can

play an important role in this process.

We manually collect data of all asset securitization projects and securities from 2005 to 2015. The sample covers

446 securitization projects and 1865 involved asset-backed bonds. We analyze the underlying assets, credit ratings,

issuing interest rates, transaction volume, regulation structure, and policy changes. Our purpose is to summarize the

main features, reveal potential problems, and identify future opportunities.

c

2017 New YorkUniversity Salomon Center and Wiley Periodicals, Inc.

Financial Markets,Inst. & Inst. 2017;26:279–294. wileyonlinelibrary.com/journal/fmii 279

280 TANG ET AL.

The analysis reveals five main characteristics of asset securitization in China. First, asset securitization marketsin

Chinaare policy constrained and policy driven. Although market demand has always existed, the market did not emerge

until policy permission was grantedin 2005. Since 2005, the initiation, suspension, restart, and explosion of asset secu-

ritization are all piloted by the government. The State Council (SC), People's Bank of China (PBoC), China Banking

Regulation Commission (CBRC),and China Security Regulation Commission (CSRC) all play active roles in this process.

Second, the asset securitization market is regulation-segmented. Both CBRCand CSRC are empowered to approve

asset securitization. CBRC approves asset securitization by banks and non-bank financial institutions. These institu-

tions are under regulation by CBRC. CSRC approves asset securitization by both corporations and financial institu-

tions, including non-financial SOEs, non-SOEs, financial leasing companies, petty-loan companies, etc.1Regulation seg-

mentation also exists in secondary markets.CBRC-regulated securitization bonds are traded in the inter-bank market.

CSRC-regulated securitization bonds are traded in the exchange markets. The two halvesof the market are largely

independent of each other. Forbonds issued in the interbank market, CBRC-supervised trust institutions function as

intermediaries. For bonds issued on the exchangemarkets, CSRC-supervised securities traders and fund management

companies function as intermediaries.

Third, the underlying assets are mainly corporate loans or assets, rather than mortgage or consumer loans as in

the US and European markets. This suggests a main problem of China's asset securitization. Because it is relatively

more difficult to separate corporateloans from corporations, risk-isolation could be a challenge. Since the outstanding

balance of mortgage and consumer loans is limited compared to corporate loans, this may impose a barrier on devel-

opment of asset securitization in China. The existing financial system is still bank dominated. Risk management in the

process of bank loan securitization could bring both challenges and opportunities.

Fourth, credit ratingsof asset-backed bonds are notably higher than other credit bonds. By 2015, 63% of the asset-

backed bonds in the sample were rated AAA. While 31% of all credit bonds were rated AAA. Risk isolation and credit

enhancement play an important role in raising the credit ratings of securitization bonds. Based on our calculation,

credit ratings of CBRC-regulated securitization bonds are three grades higher than that of their corresponding asset

pools.

Fifth, in CBRC-regulated securitization, commercial banks and other deposit taking institutions enjoy relatively

lower financing costs. The average issuing rate of CBRC-regulated securitization is 22 basis points lower than that

of the similar bonds issued by non-deposit-taking financial institutions. In CSRC-regulated securitization, listed SOEs

clearly have advantageous financing costs. Their average issuing rate is141 basis points lower than that of the simi-

lar bonds issued by other corporations, including non-listed SOEs, listed private corporations, and non-listed private

corporations.

Overall, the potential of asset securitization market in China is encouraging.On the supply side, banks have incen-

tives to spin off loans to manage their balance sheets. Corporations have incentivesto borrow money using assets as

collaterals. So both banks and corporations are in favor of asset securitization. In addition, local governments have

incentives to raise money using their assets (such as infrastructures) as collaterals.On the demand side, China house-

holds havevery high saving ratios. The huge amount of savings is hunger for more investment opportunities and instru-

ments. More importantly, enthusiastic support from policy makers opens the door for experimentationand develop-

ment, which helps transform potential into the actual.

Wealso notice some problems in China's asset securitization process. Forexample, the underlying assets are mainly

corporate loans or assets, ratherthan mortgage or consumer loans as in the US and European markets. This difference

imposes a challenge for risk-isolation. If this problem can be handled properly,the market for credit loan asset securi-

tization will be huge. We also speculate that the European style Whole Business Securitization (WBS) may have a big

potential based on the consideration that many Small and Medium Enterprises (SMEs) have few alternativefinancing

options.

The soaring development of asset securitization in China has drawn extensiveattention from regulators and prac-

titioners. However, there havebeen few academic studies. Existing studies are mostly qualitative due to the scarcity

of data. Shen (2006) examinesthe initial driving forces behind the Chinese market for asset securitization. Zhang, Zou,

and Gao (2013) conduct a qualitative study on asset securitization in China between 2005 and 2013. Zou, Zhang, and