Including local government financing platform loans in the range of asset securitization may be the biggest highlight of the new round of pilot projects. The bank asset securitization, which has been stagnant for three years, is about to restart. Recently, it was reported that the People's Bank of China (PBOC) and the China Banking Regulatory Commission (CBRC) have reached a preliminary consensus on the specific implementation plan for restarting asset securitization, and several commercial banks have begun preparing for the new round of asset securitization pilots. Since the official launch of China's credit asset securitization pilot project in 2005, more than ten credit asset-backed securities have been issued in the pilot program. However, the U.S. subprime mortgage crisis that erupted in 2008 cast a shadow over China's ongoing credit asset securitization pilot project, and out of safety considerations, the CBRC suspended the approval process in February 2009. Although the regulatory authorities' attitude towards this issue has softened somewhat currently, they still only support "conditional, restricted, and premised" asset securitization.
Including platform loans in the securitization scope might be the most significant feature of the new pilot program. After reviewing the publicly available information on the previous asset securitization pilots, we found that the assets in the first two rounds of pilots were mostly high-quality corporate loans and some personal housing mortgage loans with relatively low risks. Only the Construction Bank of China (601939) and Zhejiang Commercial Bank issued products with non-performing loans and small and medium-sized enterprise loans as underlying assets at the beginning and end of 2008 respectively. Nevertheless, the traditionally cautious CBRC has sent out positive signals. At the regulatory meeting for large banks held in January this year, Zhou Mubing, vice chairman of the CBRC, explicitly proposed that this year they will support banks with sound internal controls to select high-quality platform loans and explore the development of asset securitization business under controllable risk conditions. Would this lead to an escalation of risks?
"Platform loans themselves are not synonymous with non-performing assets. From this perspective, it depends on what kind of platform loans will enter the pilot program. I believe that the platform loans that can be included in the packaged assets should have relatively good qualifications," said Li Yamin, banking analyst at UBS Securities, in an interview with our reporter.
What does this mean for the financial system burdened with 10 trillion yuan of local government debt?
Wu Qing, a researcher at the Financial Research Institute of the Development Research Center of the State Council, told our reporter that changing the financing method does not alter the inherent quality of these assets; the risks remain the same as before. "The current pressing issue is the term problem of platform loans. Local governments borrow short-term funds for long-term use. If asset securitization is implemented, it could be an opportunity to convert short-term loans into long-term securities. However, to solve the term problem, it can also be achieved through loan extensions by banks. But if banks extend the loans, there might be concerns about potential issues with bank assets. Regardless of what action is taken, the key is to clearly account for how much debt needs to be extended."
I also noticed that last December, the National Association of Financial Market Institutional Investors sent a notice to banks, proposing to select local government financing platform enterprises as issuers for the pilot issuance of enterprise asset securitization products. The association plans to choose Guangdong, Jiangsu, Zhejiang, Shandong provinces, and Beijing Municipality in eastern regions as the first batch of pilot areas.
Another challenge faced by asset securitization in recent years has been the market's lukewarm response to asset securitization products.
Weak demand in the primary market and poor liquidity in the secondary market have led to the few issued asset securitization products being held only among banks. For example, the China Development Bank encountered a failed bid in 2007 when its first phase of approximately 8 billion yuan of Yuan Kaiyuan asset-guaranteed securities did not reach the minimum fundraising amount. Moreover, the liquidity of the two batches of already issued products in the secondary market was also very poor.
"Who will make it liquid? If the scale is not large enough, it is difficult to become liquid. If the size of each security is small, then the trading volume is insufficient. Without a fully liquid market, lending rates would be high. In terms of institutional construction, this indeed is a topic worth discussing," Wu Qing said.
Li Yamin holds a similar view. "In terms of public and transparent transactions, the previous asset securitization efforts were not done particularly well, which is one aspect affecting its poor liquidity. Additionally, the scale of the already issued products was relatively small, making them less likely to attract attention due to their small size."
After checking related materials, I found that the largest single issuance of asset securitization products in the past was by the Industrial and Commercial Bank of China (ICBC), reaching 8.011 billion yuan; the smallest was by Zhejiang Commercial Bank, only 669 million yuan. The overall scale of the first two rounds of asset securitization was approximately 66 billion yuan.
Li Yamin estimates that the scale of this round of asset securitization pilots will be around 50 billion yuan, which is still limited compared to the nearly 60 trillion yuan loan scale of the entire banking industry. "Asset securitization is a long-term trend. Under the circumstances where credit scale is subject to certain restrictions, to alleviate the pressure on bank balance sheets, the regulatory authorities may accelerate the pace. In fact, the off-balance-sheet trust business, wealth management, rural credit cooperative bill repurchase, and interbank agency payment businesses conducted by banks in 2011 were proactive attempts at asset securitization. We estimate the overall scale of these businesses to be around 2 trillion yuan."
Market participants expect that banks that participated in the previous two rounds of asset securitization are most likely to issue asset securitization products first this time. The first round of asset securitization trials involved the Construction Bank and the China Development Bank, while the second round involved ICBC, Industrial Bank, SPDB, CITIC Bank, Minsheng Bank, and Zhejiang Commercial Bank.