December 01,2007

Buck the Trend and Keep Trying

By Ma Wenluo
The American sub-prime crisis is sweeping the entire planet, but it doesn’t seem to have any effect on the progress of China’s efforts at asset securitization, which apparently is learning from Wall Street the techniques of diversifying risks of its financial system.

Late November 2007, the Chinese Banking Regulatory Commission (CBRC) approved GMAC-SAIC Automotive Finance Company and Fortune Trust & Investment to launch the first vehicle mortgage securitization project. GMAC-SAIC Automotive Finance Company is a joint venture between GMAC, one of the world’s leading financial service providers, and Shanghai Automotive Group Finance (SAICFC), one of China’s foremost non-banking finance companies, also a subsidiary of Shanghai Automotive Industry Corporation Group (SAIC). Fortune Trust & Investment is a subsidiary of BaoSteel, China’s largest steel consortium.

Chinese regulators have a clear head about the American sub-prime crisis. Either in terms of assets quality, information transparency or regulatory standards, the Chinese market environment for experimental units of asset securitization is very different from that of the US. Shen Bingxi, deputy head of Financial Market Department at the People’s Bank of China, pointed out that the sub-prime crisis broke out at a time when the US economy was slowing down-the Chinese economy however has been growing rapidly. American sub-prime lender’s fundamental assets are built around individuals who have limited repayment ability, while Chinese experimental units will only securitize with better quality assets, which is to say that fundamental assets determine the quality of asset securitization products  "We are very confident that the experiment units with asset securitization will be successful," he said.

Nevertheless, China is still in the early stages of learning curve and all securitization programs are mainly pilot. During the Asian financial crisis ten years back, financial practitioners and researchers called for the immediate implementation of Chinese asset-back securitization in order to transfer the corporate default risks from the banking system to other parties. But it wasn’t until March 2005, that China Development Bank and China Construction Bank were approved to start the experimental units.

The problem is that China’s lagging legal environment can’t support such programs. There are no laws for Special Purpose Vehicle (SPV). For securitization, SPV is designed to isolate financial risk, such as bankruptcy, from parent company. Watchdogs  only issue some directives, which cannot guarantee the isolation of risk from parent company. Chinese, however, have improvised ways of getting around the difficulty. The Chinese banking system has already launched several asset securitization products like CLO (Collateralized loan obligation), MBS (mortgage-backed securitization), and asset management companies (AMC) has also sold two NPL (Non-performing Loan) products, all through trust companies that set up SPV. In December 2006, Fortune Trust & Investment was granted a license for undertaking a special-purposed trust and eventually, reached an agreement to be the loan securitization trustee for two banks.

Regulatory agencies allowed a total amount of 6 billion RMB for the first auto loan backed securities. In America, over 75% of Auto loans are provided through securitization. The market scale of asset securitization in US is as big as 7 trillion dollars. "China will become the second largest market in the world if the process of implementing asset securitization can go smoothly". Says Frank Dubas, head of International Securitization at Deloitte.

Apart from the asset securitization products regulated by the central bank and CBRC, there are also asset-backed securities (ABS) regulated by the China Security Regulatory Commission (CSRC) and labeled as a "special-purposed asset management plan."

Even though Chinese asset securitization has just only started, overseas investors are already very aware of its progress and prospects. Macquarie & Wanda, a large Bermuda-based real estate investing fund, has initiated a commercial real estate asset securitization project. This is the first such product offered in the Mainland China.

The fact still remains that with the expectation of high interest rates coupled with the booming Chinese stock market, fixed income securities aren’t so attractive and it will be difficult to form a large-scale market for the products.  Other problems are: the separation between banking market and capital market leads to low liquidity of security; And the Chinese credit-rating sector is unable to give investors decent risk valuation.

Even when compared with other developing countries, the process is still slow going in China. For instance, credit derivative products like CDO (Collateralized Debt Obligation) haven’t even yet been planned for discussion.  But at least this may have helped the country avoid the effects from the American sub-prime crisis.

It is remarkable the Chinese regulatory agencies do not slow securitization at a time when the American sub-prime crisis is worsening. Shen Bingxi, Deputy Head of financial market Department of the People’s Bank of China said, "we will supervise the progress strictly, either CBRC or Central Bank will investigate the risks over the course of asset securitization."  But is the government’s determination to comfort investors or itself?  Probably the latter.

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