SHANGHAI: China has re-launched a programme to allow domestic institutions to issue asset-backed securities (ABS) for the first time since the global financial crisis, potentially making available trillions of dollars, but challenging the risk management capacity of regulators.
ABS gained notoriety during the global financial crisis for the part they played in the US subprime mortgage collapse, but China's newly-issued ABS products are much simpler and do not have the complex derivatives that trashed the global financial system.
If the market grows under adequate supervision, it could offer an attractive alternative funding route for banks and help stabilise the interbank market and the wider financial system.
But analysts say that if corporate transparency and oversight are not improved, the Chinese ABS market could offer as much risk as benefit.
"Risk control, such as establishing an effective supervisory system and improving the quality of ABS issuers, will remain the main concern," said Liu Junyu, a money market analyst at Chinese Merchants Bank in Shenzhen.
The world's second-largest economy has huge potential as an ABS market. The assets in the banking system stood at 126 trillion yuan ($20 trillion) by the end of June. Banks had total outstanding yuan loans of 60 trillion yuan, about 62 percent of all China's total financing, le a ving plenty of room for the still-tiny ABS market.
China launched a pilot programme for asset securitisation in 2005, and a total of 11 financial institutions sold a combined 66.785 billion yuan worth of ABS in the following three years before the government suspended the programme during the global credit crisis.
REGULATORS TAKE LEAD
In May this year, three related regulators issued a joint notice reviving the ABS programme. The People's Bank of China (PBOC), the China Banking Regulatory Commission (CBRC) and the Ministry of Finance also set an initial quota, allowing banks to issue up to a combined 50 billion yuan in asset-backed securities.
Many worry that China's giant state-controlled banking sector will come under increasing pressure this year and next as a slowing economy drives more borrowers into default, dragging on bank revenues.
Banks need cash to meet their required capital adequacy ratios, but a weak stock market - combined with the fact that all the major banks have already listed - makes it difficult to raise money there.
Traders say this conundrum at times causes banks to surreptitiously dredge the interbank market for funds to meet month-end regulatory tests, causing monthly distortions in short-term money rates that impact the wider market and obscure the true state of bank finances.
Analysts said Chinese banks might need to raise a combined 200 billion yuan in additional capital from the markets to meet capital adequacy requirements, if deposits continue to shrink as economic uncertainty increases.
Using the new ABS quota, China Development Bank (CDB) , the country's primary policy bank and a pioneer of the 2005 ABS market launch, sold 10.2 billion yuan of credit-backed securities last Friday on the interbank market.
The ABS were backed by 49 performing corporate loans with a weighted average annual rate of 6.27 percent, extending credit to 43 borrowers from 16 different industries including oil, railways, coal, metals, paper manufacturing, power generation, transportation and non-bank financial institutions, the bank's prospectus said, providing diverse and reliable cashflows to pay interest to investors.
Bank of Communications , and China's four biggest banks, led by Industrial and Commercial Bank of China , also aim to obtain part of the quota, traders say.
GO TO MARKET, PLEASE
Beijing has not only resumed the ABS programme, it has also enlarged the pool of potential participants.
Five local government financing vehicles (LGFVs) were permitted to issue a combined 5.5 billion yuan in ABS since the start of August, the first time that such entities were permitted to issue ABS, the official China Securities Journal reported, and more than 20 other such firms are now applying for issuance, it said on Tuesday.
Local media earlier reported that 10 trust firms had also been approved to issue ABS, and applications from the financial divisions of cooperates were also being considered.
This gives the new programme a two-pronged effect, both directly relieving banks' capital needs and simultaneously reducing demand for bank loans from a select pool of customers, which will be able to fund themselves by direct ABS issuance.
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