As Chinese financial markets become more sophisticated, companies are eyeing new possibilities to unlock value, and intangible assets hold great promise, writes Sophia Luo
China restarted its asset-backed securitisation (ABS) business back in 2012, but in recent years, the rapid emergence of novel financial products – such as securitisation of data assets, green assets and intellectual property (IP) assets – is streaming into parallel with China’s development agenda and aiming to solve financing problems in these particular fields. All this brings fresh new opportunities and challenges to the market, says Wang Lihong, Beijing-based senior partner of Dentons’ Banking and Finance Practice Group.
Li Mingyue, a partner from Tian Yuan Law Firm’s Beijing office, says the importance of data, including the securitisation of data assets, has unquestionably been lifted to a national level. On 1 September 2021, the Data Security Law entered into force, which reconfirms the significance that policymakers have attached to the ecological construction of data, and Li says there is little doubt that it will intensify interest in data asset transactions, including securitisation.
Matthew Ching, a partner from Jingtian & Gongcheng’s Shanghai office, says the corresponding receivables of auto loans, mortgages, student loans, credit card debt and asset-backed commercial paper (ABCP) in the US ABS market, for instance, are all dispersed debts with a relatively long track record, and have had “comparatively stable, regular statistical characteristics”. They all fall into the typical category of data assets.
The application of blockchain technology in the field of IP rights, and the use of technologies including big data and the internet of things (IoT) to track the “logistics, information flow and cash flow” of real estate and infrastructure projects could also fall under this category.
“The three major types of asset-backed securities − credit assets, assets based on the right to yields and real estate assets − could all be mapped to data assets, and by means of embedded technologies such as blockchain and artificial intelligence, the share-based transactions and turnover could be carried on in a more efficient manner,” says Ching.
“In the future, the data asset has all the elements required to become the main category of fundamental asset. It will connect multiple types of fundamental assets based on previous standards for further combination and optimisation.”
Li notes that in current business scenarios, the role that data assets could play is still limited to being tool-based, while the essence of the securitisation of data assets lies in the securitisation of the asset itself, or relevant rights based on the asset, where the fundamental or underlying assets should be data assets. “Thus it can be said that so far we have not yet blazed a trail in the securitisation of data assets in any real sense,” she stresses.
Ching says this is because the characteristics of data assets such as intangibility, dependence, diversity, machinability and value volatility pose many challenges to the development of novel businesses, including the securitisation of data assets and data trusts. The primary difficulty lies in fixing a price for data assets, but there is also the thorny problem of confirming data rights.
Li says the most fundamental problem that remains to be addressed is how the underlying assets can meet the requirements of securitisation. They need to meet the legal requirement with ownership defined in clear terms, and to be able to generate independent, predictable and specifiable cash flows. Other factors include which assets can be pooled for securitisation, how the securitisation of raw data into tradable assets before the pooling can be completed, how data assets can be valued and priced, as well as how the rights of data can be confirmed and specified.
Constrained by the fact that the basic legal system involving the rights definition, protection and transaction of data assets has not yet been set up, there is no sophisticated, viable solution at the moment.
Although it will take time for ground-breaking rules and regulations to come into force, Li emphasises that the arrival of the big data era is an irreversible trend. “Both emerging companies like internet firms and traditional enterprises need to seize the momentum … to further improve their production efficiency and create more value by capitalising on production data,” she says.