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Why investors overlook China’s asset securitization market
China’s asset securitization products increased substantially in 2016, but language barriers and concerns regarding China’s local government debt prevent overseas investors from participating in China’s asset securitization market.
Agnes Zhou 2 Mar 2017

China’s asset securitization products increased substantially by 37% to 842.1 billion yuan in 2016 from its previous level in 2015 as a result of new regulations and a strong appetite for domestic institutions which need to convert assets that can generate cash flow into liquid assets.

But despite the sharp increase in securitized assets and new regulations implemented in 2015-2016, there are still major issues that may impact the confidence of overseas investors in the prospects for China’s securitization market.

According to data from the “Asset Securitization Report for 2016”, issued by the China Central Depository & Clearing Company, the only sovereign bond custodian authorized by the Ministry of Finance, the asset securitization products issued in 2016 consisted of corporate asset backed securities (ABS) amounting to 438.5 billion yuan, credit ABS amounting to 386.9 billion yuan, and asset backed notes (ABN) amounting to 16.7 billion yuan.

Under the category of credit ABS, collateralized loan obligation (CLOs) and residential mortgage-backed securities (RMBS) accounted for the largest proportion, amounting to 142.2 billion yuan and 138.1 billion yuan respectively. Under the category of corporate ABS, rents ABS occupied the largest portion amounting to 102.8 billion yuan followed by receivables ABS which amounted to 85 billion yuan.



According to He Xiaorui, senior bond manager, business department of the SSE, the reasons cited for the substantial increase in asset securitization products in 2016 are incentives to encourage securitization launched by regulators as well as the need by domestic institutions who need to convert assets that can generate cash flow into liquid assets.

Despite the substantial increase in 2016, there is still a lot of room for China’s securitization market to grow in the next two years.

Issues and challenges

One issue that faces development of China’s securitization market is the language barrier that continues to make searching for accurate and reliable data challenging and confusing for overseas investors.

“Sometimes overseas investors may feel confused or worried since China uses a completely different finance and regime structure, although from the point of view of many Chinese, concerns raised by overseas investors are actually not that serious,” according to analysts.

For example, one of the biggest concerns raised by overseas investors is the issue of the massive amount of China’s local government debts. In 2016 alone, local governments issued bonds worth a combined 6.05 trillion yuan (US$880.4 billion), according to data from China Bond Rating.

“But actually these debts are not welfare expenditures, these are for infrastructure, and are backed by assets,” says professor Li Daokui of Tsinghua University, a former member of China’s monetary policy committee.

This is not the same as private ownership in other countries. In China, the land and natural resources are owned by the state, and local governments are authorized to sell the use rights. However, regulators do not encourage the excessive selling of land by the local government.

“Land is the major guarantee for local government debts, however, the over reliance on land affects the health of the local economy,” says Li Zuojun, deputy director of the institute of resource and environmental policy of the State Council Development Research Center.

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