The structured finance market is diversifying in China, with the emergence of collateralised loan obligations (CLOs) and auto loan asset-backed securitisations (ABS). But the development of an offshore market will require regulatory change.
Following a surge of informally-securitised loans through wealth management products (WMPs) in China, regulators have taken steps to move the country’s shadow banking market into the regulated space.
Regulators had contemplated securitisation pilot programmes before the 2007 global financial crisis, but quickly halted their plans. The Chinese Banking Regulatory Commission (CBRC) reopened the market in May 2012.
Since then securitisation has grown rapidly. “CLOs are quite common, but banks have just been looking at CMBS [commercial mortgage-backed securities] and RMBS [residential mortgage-backed securities],” said Roy Zhang, partner at King & Wood Mallesons in Shenzhen.
China is still a relatively domestic market. Although major finance companies have renminbi-qualified foreign institutional investor (QFII) quotas, foreign investors don’t have much access to the markets.
Regardless there are more products available. Volkswagen sold its Driver China One securities last year, which was the first auto loan-backed securitisation from China to receive international ratings.
And the market is expected to diversify. Zhang added that banks are looking at this market and are doing more deals on a regular basis as encouraged by the regulators. “The asset class that they’ve been looking at is credit cards, but how that would be structured in the market is another question – that would be quite different from a CLO.”
KEY TAKEAWAYS
China’s onshore securitisation market will diversify beyond CLOs and auto-loan-backed securitisations to credit card securitisations and other asset classes;
There are two regimes for securitization in China governed by the PBOC and CBRC, and CSRC;
The most common securitization deals in China are CLOs, which make up over 90% of the market;
The development of an offshore securitisation market will depend on regulatory change, particularly in relation to capital controls and withholding tax
Onshore structures
There are two different securitisation programmes in China. The China Securities Regulatory Commission (CSRC) governs the specific asset management programme (Samp), while the People’s Bank of China (PBOC) and the China Banking Regulatory Commission (CBRC) oversees the asset-backed specific plan (ABSP). Securitisations by auto finance companies are also issued under the CAS programme.
“There are two different types of rules and regulators, so there are still two different markets,” said Zhang. “Although there is huge demand for the markets to merge, this hasn’t happened yet.”
CLOs issued under CAS remain the most popular structures. According to a March report by Moody’s, CLOs account for 90% of the total RMB 312 billion ($50 billion) securitisation issuance since May 2012.
The market grew rapidly last year: in 2013 six CLOs were completed, securitising 168 loans for RMB 16 billion. In 2014 54 deals closed with 3419 loans securitised for a total of RMB 255 billion.
And a broader range of issuers came to market, with asset management companies, city commercial banks and rural commercial banks joining state-owned banks, policy banks and joint-stock commercial banks.
Conversely deals under ABSP are listed on a stock exchange, but they have been rare. In 2013 Alibaba and Orient Securities opened this market, pricing the first microloan-backed deal under ABSP’s predecessor, Samp.
Concerns over the bankruptcy remoteness of securitised assets have transitioned from Samp to ABSP. “Bankruptcy remoteness still remains an issue, but CSRC is considering revising this law,” said King & Wood Mallesons’ Zhang. “That will take some time.”
Offshore development
The development of an international market will depend on regulatory change.
“The deals we tend to see are the ones that have a cross-border element,” said Victor Wan, partner at Linklaters in Hong Kong. “And for a lot of these traditional deals, the cross-border element often knocks into fairly difficult capital control issues.”
For example, in a CMBS involving commercial real estate, the issuer is usually trying to securitise the rental income. And in almost all cases, the property owner – or the entity that actually owns the building and who is therefore the landlord – is a mainland Chinese entity.
“That creates problems because the business is in China, the tenants are in China and the landlord is in China so rental income is a purely internal Chinese remittance,” Wan added.
Capital controls are less of a problem for some types of deals because they make a distinction between the current and capital account.
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"The cross-border element often knocks into fairly difficult capital control issues" |
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And issuers are interested in offshore deals. “There’s a lot of interest among the Chinese banks on securitising their corporate loan portfolios and selling them offshore, but nothing’s been done yet,” said Wan. “They’re hoping to securitise loans to businesses onshore, as well as some of the smaller trade-finance-type loans.”
He believed that an offshore CMBS by Macquarie’s Dynasty Property Investment could be a benchmark for future deals once the capital account opens; international investors saw the structure in 2006 and 2014; Linklaters acted for arranger Standard Chartered in 2014.
“Now that they know the structure, it should, in theory, be easier to sell,” he added.
A final hurdle could be taxation. “As the market opens and develops into a truly cross-border market, we’ll need to see some regulatory changes – for example, around withholding tax,” said Paul McBride, partner at King & Wood Mallesons.
At the moment, he explained, there would be tax akin to withholding tax added to interest payments from onshore to offshore. That’s not present in other markets; in the Korean market there is a specific securitisation legislative platform that provides for withholding tax exemptions for ABS.
See also
China auto ABS revives securitisation optimism
Rating agencies’ views differ on Kaisa default
Chinese bonds: credit enhancement evolves