13 March 2012
Although securitisation in China dates back to the 1990s, transactions done in the early days were hampered by a lack of legal infrastructure. With the promulgation by the People's Bank of China (the "PBOC") and the China Banking Regulatory Commission (the "CBRC") of the Measures on the Administration of Credit Asset-backed Securitisation Pilot Programme (the "Securitisation Pilot Measures") on 20 April 2005, many of the issues previously restricting the development of securitisation in China were addressed. However, the Securitisation Pilot Measures imposed a strict approval requirement on securitisations and only applied to "credit assets" of banks/financial institutions, meaning that only banks/financial institutions were eligible to apply to CBRC for approval to issue asset-backed securities ("ABS") for circulation in the PBOC regulated domestic inter-bank bond market1.
Under the Securitisation Pilot Measures, the CBRC issued two rounds of approvals for securitisations, including the 2008 GMAC-SAIC auto loan securitisation which implied an extension by the CBRC to include non-bank financial institutions as eligible financial institutions. According to non-government statistics, during the period between April 2005 and December 2008, 11 banks and financial institutions issued ABS in the two rounds of approvals, with a total value of RMB 66.783 billion, across a range of underlying asset pools including home mortgage loans, auto loans, SME loans and non-performing loans.
However, with the U.S. sub-prime debt crisis in 2008 and the ensuing global financial crisis, the CBRC ceased issuing approvals under the Securitisation Pilot Measures, causing the burgeoning market to stall.
Although no official pronouncement has occurred, it is being reported by several Chinese media that a third round of approvals for securitisations under the Securitisation Pilot Measures will come up soon and the cap on approved ABS is reported to be RMB 50 billion. It is also reported that several Chinese banks have already commenced work on setting up securitisation programs. The media reports provide, in summary:
- Consensus has been reached between the PBOC and CBRC on the implementation of the third round of approvals, which will be granted in accordance with the Securitisation Pilot Measures.
- CBRC holds a positive view towards securitisation but requires that the eligible financial assets be of relatively good quality with stable earnings, investment risks are easily identifiable and securitisation should adopt a simple structure (rather than complicated and synthetic structures).
- Eligible financial assets will be extended to include agricultural industry loans, credit cards and local government loans.
- A broader range of banks/financial institutions are expected to be eligible to participate in the new round.
- ABS issued under the new round will (like previous rounds) be issued and traded through the domestic inter-bank bond market (i.e. with restricted access for offshore investors). However, it is expected that non-bank domestic investors, such as social security funds and insurance companies, will be encouraged to invest in the ABS , to facilitate demand and create liquidity in the secondary market.
- On-balance sheet structured financings, such as covered bonds, will be investigated by the PRC authorities.
Whilst the market is expecting an official announcement on the re-launch of securitisation in China by the PRC authorities, such media reports are encouraging. Given the present squeeze on credit and the lack of approvals to securitise financial assets for the past three years, securitisation will once again provide PRC financial institutions with an effective vehicle to offload credit and increase asset liquidity. It is hoped that the market will become more mature and effective with more securitisations, coupled with an increasing variety of underlying assets and eligible originators.
Unfortunately, there have been no media reports on reactivating the corporate asset securitisation programme by the CSRC.
Lastly, the interest in covered bonds is welcome and would provide an additional funding option for PRC financial institutions (in addition to general senior debt and, under the re-launch, securitisation) and would align China with other jurisdictions in the Asia Pacific implementing covered bond regulations (such as Korea and Australia) to provide financial institutions with access to credit markets and help reduce their reliance on government liquidity funding programs.
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1. Securisations of "corporate assets" were subject to a separate regime regulated by the China Securities Regulatory Commission ("CSRC").