In its July legal update, Dechert described the re-launching of China's ABS program as a “milestone” in the development of ABS in the country.
The People’s Bank of China, the China Banking Regulatory Commission (CBRC), and the Ministry of Finance announced the re-launching of China’s pilot securitization program on May 17.
The securitization initiative comes at a time when China is looking for new ways to ease the credit pressure on its banks and to free up capital to support growth. This program allows qualified and approved financial institutions to once again issue ABS. The suspension of a similar program stopped any securitization activity during the global financial crisis in 2008.
The first phase of the new pilot program is expected to involve up to $7.9 billion of securitized assets, according to Dechert.
The process for structuring a securitization under the new pilot program involves a financial institution transferring credit assets to a newly formed special purpose vehicle (SPV), aligning with a typical securitization transaction. The accepted form of SPV is a special purpose trust or another institution approved by the CBRC. The entire issuing and trading process is supervised by the CBRC, which also approves the participating financial institutions under the program.
The notice also allows non-banking institutions, including insurance companies, mutual funds, and social security funds to buy the securities.
Dechert listed five regulatory oversight and risk control measures, including that two credit rating agencies will rate the securitized assets and report their results to China’s financial regulators. An originator is required to maintain a specific portion of the lowest class of ABS issued in a single securitization for the duration of these securities. Any financial institution is limited to holding no more than 40% of the total issuance of any security. The trustee of an SPV is required to regularly and publicly reveal the performance of the underlying assets. Securities must also have simple and clear structures.
The notice is specifically addressed to several financial institutions as a way to urge them to apply to the CBRC for approval to be involved as issuers in the new pilot program, Dechert said.
all of which are in line with the priorities of China’s 12th Five-Year Plan.8Eligible assets for securitization under the new program are basic infrastructure, auto, affordable housing construction, small and medium-size enterprise or SME loans and other similar loans. These are all in line with the priorities of the country's 12th Five-Year Plan.The China Construction Bank, the Agricultural Bank of China, and the China Development Bank and other banks that have a high exposure to these loans will likely be part of the program.
