It hasn’t been an easy year for China securitization. The Chinese authorities increased the limit for new securitizations for 2015 to Rmb500bn following a record 2014, but with three months left before the calendar changes, volumes stand at a bleak Rmb237.7bn, according to Dealogic.
The numbers look bad, but the feeling in the market is anything but with practitioners putting down poor volumes to concerns over China’s slowing growth, the stock market crash, and currency volatility.
None of the problems are ABS-specific. So if you look beyond volumes, China has actually done an amazing amount of work this year to boost its market.
The National Association of Financial Market Institutional Investors (Nafmii), for example, has unveiled four disclosure regimes just this year, with the latest one on consumer loans unveiled at the end of September. That followed guidelines on auto loans, residential mortgages and urban renewal-linked loans.
The rules are all pretty standard, but it’s the signal Nafmii is sending out that is important. It shows that China is serious about developing its ABS market beyond just conventional CLOs — and it’s a move that should be lauded.
As it stands, CLOs make up close to 90% of all outstanding ABS in China. But this year has seen the emergence of consumer loan ABS, margin loan ABS, SME loan ABS and urban renewal-linked ABS — all of which have added some much-needed diversity to the market.
Having more variety, however, is useless if the approval process lacks transparency and is solely up to the discretion of the two gatekeepers – the China Banking Regulatory Commission (CBRC) and the People’s Bank of China (PBoC).
Until recently, the approval process was on a deal-by-deal basis, making it hard for a company to include securitization as a consistent source of funding when it had no idea when the relevant approvals would come.
Thankfully, that has been abolished and the regulators have instead introduced a registration system in which repeat issuers are free to issue ABS based on an approved quota. New firms still need to get the green light from both the regulatory bodies, but the relaxation nevertheless marks a step in the right direction.
While there are valid concerns about China’s tight grip on capital controls and the lack of a natural ABS investor base in the country, this is not something that can be changed overnight. But China is laying the right ground work now so that as more investors and issuers come on board, they will find a market that offers the support and diversification they need.
And despite the poor sales figures, one segment of the asset class — auto ABS — has impressed with volumes so far this year three times that recorded for all of 2014.
Deal flow is not the be all and end all way to gauge a market’s progress especially in such a nascent asset class. There may be safety in numbers, but not in a market as young as China ABS.