Finding the finance

China’s ABS market has pulled off a remarkable recovery since the pandemic, but the real estate credit crunch and other economic risks have forced businesses to seek new avenues for financing, writes Sophia Luo

Amid the twists and turns of pandemic-ravaged 2020, China’s asset-backed securities (ABS) market managed to continue its growth trajectory following a U-shaped recovery.

The market has shown no signs of losing momentum in the first half of this year, with offerings totalling RMB1.3 trillion (USD202 billion), up 45% from the same period last year. Specifically, credit ABS more than doubled in the past year – with 105% year-on-year growth thanks to a low base because of slower issuances during the pandemic in 2020 – making up 31% of total ABS issuances this year.

ABS backed by corporate debt increased by 20% compared with the same period last year, accounting for 50% of the total, while asset-backed medium-term notes (ABNs) jumped by 53% from the first half of 2020, contributing to 19% of total issuances.

The issuance of standardised ABS products amounted to nearly RMB2.9 trillion last year, representing a 23% year-on-year increase. The market inventory by the end of 2020 reached about RMB5.2 trillion, translating into growth of 24% compared with the previous year, according to the 2020 Asset Securitisation Development Report published by China Central Depository & Clearing (CCDC).

Since the launch of the Administrative Measures for the Pilot Securitisation of Credit Assets in 2005, China’s ABS market has taken a hard road to becoming the world’s second-largest.

Li Mingyue, a partner at Tian Yuan Law Firm’s Beijing office, says the conventional business of asset securitisation has hit a bottleneck in the post-pandemic era for two main reasons. On the one hand, China’s overall economy has grown at a slower pace in the past two years due to the deadly virus and an unstable international investment climate. Financing demand from the real economy, including the needs of the ABS market, has experienced a deceleration in growth.

On the other hand, the rise in debt defaults has become a regular thing in the bond markets, which has had an impact on the risk appetite of investors and the investment side of the ABS market.

Add to this the real estate industry, which takes a lion’s share of underlying assets of the ABS market and has borne the brunt of unprecedented regulatory tightening. The securitisation of real estate assets involving individual house mortgage loans has been inevitably affected by total issuances’ downward trajectory compared with the previous year.

However, Li stresses that, compared with countries and regions known for their established and sophisticated ABS markets, asset securitisation in China is still in its early days. The new round of industry-wide transformation and exploration is well underway, and corresponding short-term challenges can hardly be avoided. “We cannot jump to the conclusion that the industry has reached the limit of growth at the current stage,” she says.

Riding high on nationwide undertakings to strengthen the ability of financing to serve the wider economy, Li says there is potentially huge financing demand from the real economy to be unlocked. Many companies, especially private enterprises with other financial channels subject to certain restrictions, will seek to raise funds from the ABS market. When choosing the investment targets, investors will also switch their focus further from corporate credit rating to the quality of underlying assets.