In a bid to capitalize on the potential of China's expanding capital markets - including securitization - Cadwalader, Wickersham & Taft LLP has hired Charlie Wang as a partner in its Washington office. Wang, who rejoins the firm after a stint at Wiley Rein and Fielding, is originally from Mainland China, where he served as a judge in the commercial division of the Chinese District Court.
There is a real sense among many ABS professionals that the potential for securitization in China will soon be realized after numerous false dawns. In May, Industrial Bank of China (ICBC) closed a Rmb820 million (US$99 million) deal backed by non-performing loans (See ASR 4/19). Credit Suisse First Boston arranged the transaction - rated triple-A by local agencies - while Citic Securities marketed the deal.
One month later, China Construction Bank appointed CSFB and Lehman Brothers to work on a local currency residential mortgage-backed securitization, which was recently approved by the vice-chairman of the central bank (see ASR 6/21). There are high expectations that auto loan and credit card transactions will soon follow.
With momentum building, there will unquestionably be opportunities for law firms.
However, with Wang based in Washington, will Cadwalader be well placed to capitalize on them? In an interview with ASR, Wang expressed confidence that client demands could be met, even raising the possibility of establishing a Chinese office if necessary.
"Although I'll be based in Washington, Cadwalader has offices in other locations, including London and New York so the firm has the resources capable of serving our clients in China," says Wang. "Obviously my role will involve frequent travel in Beijing and Shanghai [shortly after the interview, Wang departed for a month long business trip to China]. The firm views China as a strategic base for securitization and if our clients require us to establish a more permanent base we would not rule that out."
Looking at the big picture, there are more significant challenges up ahead. Although ICBC was able to use the trust laws to issue a deal that conformed to many features expected from securitization, it still departed from the true sale structures seen in other jurisdictions.
Reports from China suggest CCB will use the same model, whereby assets are transferred to a trust company. The trust has the right to manage, dispose of and profit from those assets, but ownership of the assets still resides with the originator. Wang feels this could create problems in peddling such deals to global investors.
A lack of true sale is not the only obstacle to a mature securitization industry in China. For one thing, accounting standards are not fully established, which might create ratings issues with international agencies. In addition, China's Company Law does not recognize special purpose vehicles in relation to securitization, while bankruptcy legislation makes no provisions regarding bankruptcy remoteness. According to Wang, this gives the courts a lot of discretion, which he feels can create uncertainty.
Like many of his peers, Wang would like to see the Chinese authorities take the initiative in establishing a legal and regulatory framework conducive to securitization. Given his experience within the country's legal system, Wang knows change takes time.
"The Ministry of Finance initiated a study on an ABS law two years ago, which is still being worked on," he explains. "I hope that within two-to-three years, all the necessary legislation and regulations will be in place." A bankruptcy law is due out by the end of this year, Wang added.
Wang believes China's market will evolve less like the US model and more along the lines of Japan and Taiwan - both of which have specific ABS legislation, and where trust structures are more commonly used. The development of securitization in both markets bears testament to the adage where there is a will, there is a way.' In Wang's opinion, there is no reason why China should not be the same.
"The State Council [the entity chiefly responsible for making policy recommendations to the government] has the authority to make securitization independent of the other laws if it wanted to," says Wang. "By this I mean that it can make securitization structures exempt from company law and it can achieve the required bankruptcy remoteness through specific ABS regulations without changing existing bankruptcy law. This may happen soon."
With China's economy roaring ahead while other Asian markets stagnate, it has always been tempting to regard the country as the securitization holy grail, even if the reality has been less than satisfying. Wang, however, is optimistic that the huge potential is now a lot closer to fruition.
"If we had been having this conversation ten years ago, it would have been too early but rapid economic growth, coupled with new laws and regulations, make this the right time to build up our practice," asserts Wang. "Cadwalader will take a very active role in the establishment of a securitization market in China, which will soon be a reality, even though there are hurdles to overcome."
Copyright 2004 Thomson Media Inc. All Rights Reserved.