The market turbulence in the U.S. is not stopping China from securitization, a process of creating financial instruments by combining other financial assets and then selling them to investors.
On September 5, Shanghai Pudong Development Bank announced it plans to issue $58 million asset-backed securities, or ABS, a security backed by assets such as loans, leases, credit card debt, a company’s receivables and so on. Earlier on August 28, People’s Bank of China clarified policies on information disclosure of asset pools (“pools” of assets used to back securities), indicating China plans to expand securitization, despite worries that securitization may magnify trouble in a single market segment to the whole system.
In the U.S., asset-backed securities are market-driven innovations with roots back in the late 1970s. In China, securitization is almost completely a government-driven process only two years old.
In March 2005, China’s State Council approved an asset securitization pilot program led by China Development Bank and China Construction Bank. The two banks had since issued $1.7 billion asset-backed securities in the interbank bond market until April 2006.
However, the road has been bumpy. In June, China Development Bank failed to issue $108 million collateralized loan obligations (a form of ABS backed by receivables from loans and divided into different tranches) because of lukewarm investor interests.
The pilot program exposed other challenges as well. Asset pools failed to disclose information accurately, and credit rating services were unable to rate credit-worthiness fairly. The program also limits issue institutions to policy and commercial banks, and only individual mortgage and infrastructure loan have been securitized.
That will change with the pilot program’s expansion. Trust, asset management companies and corporations may eventually issue ABS. The type of assets may extend to include credit card debt, companies’ receivables and non-performing assets. And with more investors interested in ABS, including pension funds, hedge funds and insurance companies, China’s potential in ABS market can go a long way – if challenges are handled properly.
