China's securitization market finally reached a new maturity level this fall, with new participants and new deal structures. The watershed moment was September's listing of asset-backed securities from China Unicom on the Shanghai Stock Exchange. Additionally, two bank-based pilot projects are expected.
The two banks, China Construction Bank and China Development Bank, received government approval to begin securitization this past March.
"The topic of asset securitization has become increasingly hot since the beginning of this year," said Jeff Wei, founder of Shanghai-based research firm CnWallstreet.com.
The approval came just one month after the China Banking Regulatory Commission issued new regulations regarding asset backed securities, allowing inter-bank bond market trading and defining the role of a special purpose trust company as a part of the securitization process, Wei said. "Before the two bank projects, there hadn't been any true securitization products in China," Wei said. "Though the securitization history can date back to the 1990s, when there were several immature trials."
According to Wei, Chinese securitization regulations require that the assets backing the securities bring in a steady income, that a special purpose vehicle be used as an intermediary between the originator and the investors, that the loan assets be transferred through a true sale, and that the products be publicly traded.
"The last two features are extremely important indicators of a true securitization product," Wei said. With the Unicom securitization project traded on the Shanghai Stock Exchange, and the two planned bank projects expected to be traded in the interbank bond market, the problem of liquidity is taken care of, Wei added.
The requirement that the loan assets be transferred to an SPV was the issue that had been holding up the securitization project at the China Construction Bank, a bank official said on the condition of anonymity. As a result, its application was rejected five times, until it finally agreed to move the assets off its own balance sheets to a separate company.
"Inside balance sheet financing cannot insulate the credit risks of the mortgage loans effectively," said the official. "That's why the regulators would not give approval."
The China Unicom project also moves the fundamental assets to a SPV, said Xushen Yang, a securities and securitization attorney at Beinging based law firm King & Wood. Yang was an advisor on both the China Construction Bank and China Unicom securitizations.
"It can be regarded as a true securitization product backed by enterprise assets," he said.
Unlike the two projects originating in the banking industry, the China Unicom project is approved by the China Securities Regulatory Commission and in accordance with related regulation for securities firms.
The project was handled by the China International Capital Corp., a leading Chinese brokerage company.
Other brokerages are expected to follow suit, said Yonggang Wu, a research analyst with Guotai & Junan Securities Co., based in Shanghai.
"This is just the start," Wu said, explaining that a total of 12 Chinese brokerage companies have already received special permission from the Chinese government to pursue "innovative" projects, such as the China Unicom deal.
According to local newspapers, up to 10 brokers are planning securitization projects involving everything from expressway fee receivables to hospital equipment leasing.
The Chinese securities industry is currently in a state of crisis, with the stock market at eight-year lows. The government has had to step in and bail out several companies in order to protect retail investors.
As the China Unicom project demonstrates, by getting involved in securitization projects, brokerage firms can bring in new business, but also bring new life and energy to the securitization industry has a whole.
Wu added that this move fully reflects the spirit implicated in the opinions released at the start of last year by Chinese Securities Regulation Commission Chairman Fulin Shang. He expressed the idea of enriching financial products for investment and encouraged doing research in the area of asset securitization.
"It also solves the problem of the disconnect between the money market and the capital markets," CnWallstreet.com's Wei said. "And it creates new choices for investors."
Guotai & Junan analyst Jing Liang added that these kinds of investments may be less risky for investors than the equities market. In addition, this gives companies a way to raise funds without selling equities or borrowing from banks. Most Chinese enterprises are currently restricted from issuing corporate bonds.
The Shenyin & Wanguo Securities Co. also tried set to up a securitization project based on RMB1 billion ($123.8 million) mortgage assets from the Shanghai Pudong Development Bank.
The project was suspended, however, due to a lack of experience and expertise, said Yun Zou, a senior analyst with the firm. The lack of experience is a problem for everyone in the industry, Zou added.
China Construction Bank and China Development Bank are structuring their projects with the help of foreign advisors, namely, Standard Chartered and Lehman Brothers.
"The participation of the prestigious investment bank enlightened us a lot," said an official in the property financing division of China Construction Bank. "It also enhanced our credibility."
Standard Chartered brings significant experience in ABS in China, as well as in other countries around the world.
"We have established a track record in pioneering high profile cross-border asset-backed securitization in China, such as for China International Marine Containers and COSCO, since the 1990s," said Warren Lee, head of Asian asset-backed securitization at Standard Chartered. Lee said that CIMC and COSCO were both true securitization projects, conforming to international standards.
However, according to Changhua Jin, a financial lawyer at the Shanghai branch of Beijing-based Longan law firm, the projects had to take place outside of mainland China because of the lack of a legal framework within China. Jin added that the lack of such a framework is the single biggest obstacle that the securitization industry faces in China today.
"An established legal framework is conducive to a successful securitization market," confirmed Credit Suisse First Boston Vice President Ruoyu Jiang, who was a member of the team structuring the first non-performing loan securitization transaction in China. "The laws related to securitized products are relatively new and incomplete."
CSFB was the sole financial advisor in disposing of a RMB2.6 billion portfolio of non-performing loans from Industrial and Commercial Bank of China's Ningbo Branch last year. Industrial and Commercial Bank of China is the largest commercial bank in China and one of the big four government-owned banks.
For example, other countries have laws covering the double-taxation issue that arises with securitization projects, said Jin. In China, this is a controversial issue that still hasn't been resolved.
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