Shadow-Banking Curb Fuels Loan-Backed Debt Spree: China Credit
Chinese banks’ sales of bonds backed by loans have surged 22-fold this year as the government seeks to curb shadow banking, while still allowing lenders to make room on their balance sheets for new financing.
Banks have issued 78.7 billion yuan ($12.7 billion) of such securities, compared with 3.6 billion yuan in the same period last year and 15.8 billion yuan for all of 2013, Bloomberg-compiled data show. Such transactions must get approval from regulators and are more transparent than wealth-management products and trusts, which have been used by banks to bypass capital controls.
Premier Li Keqiang is seeking to shift financing to official channels after shadow-banking assets jumped 32 percent in 2013 to 38.8 trillion yuan, according to Barclays Plc estimates. The banking regulator tightened rules on new trust products in April, after failures of such investments sparked protests. Authorities approved the first asset-backed security tradable on the Shanghai stock exchange last month, and yesterday authorized the first mortgage-backed notes since 2007.
“Regulators are closing one door, but opening a window,” said Liu Dongliang, a senior analyst in Shanghai at China Merchants Bank Co., the nation’s sixth-biggest lender. “To Chinese regulators, asset-backed securities, which are standardized products, are safer and more transparent than the shadow-banking products that are hard to monitor.”
Asset-backed securitization, in which lenders package loans into collateral for note sales, can help banks make room on their balance sheets for new lending. The practice has attracted global regulatory focus since the 2008 financial crisis, when loans to subprime home buyers in the U.S. went bad. China resumed approvals in 2012 as part of steps to expand fundraising channels after halting the development in 2009.
Since the resumption of such offerings in 2012, regulators have approved 400 billion yuan in quotas, according to Moody’s Investors Service. China Development Bank Corp. will sell 10.9 billion yuan of loan-backed securities today, according to a statement on Chinabond on July 9. Postal Savings Bank of China Co. will issue 6.8 billion yuan of the notes on July 22, according to a statement on the website of Chinabond yesterday. The securitization is backed by residential mortgage loans.
“The blessing from the regulator is one of the drivers for the rapid increase,” said Jerome Cheng, a senior vice president in the structured finance team of Moody’s in Hong Kong. “Securitization can help alleviate some of the concerns over shadow banking. ABS issuance can also help channel funds to the under-served small-and-medium sized firms, urban development and infrastructure.”
Such projects have been a focus of Premier Li’s efforts to boost economic growth, which analysts surveyed by Bloomberg forecast will slow to 7.4 percent this year, the lowest in more than two decades. The cooling expansion has pushed the yield on China’s benchmark 10-year sovereign note down 40 basis points this year to 4.16 percent. The yuan has fallen 2.5 percent this year against the dollar.
Asset-backed transactions in China are subject to approval by the China Banking Regulatory Commission and People’s Bank of China. In addition, regulations including a “skin-in-the-game” rule, which requires the issuer to buy at least 5 percent of sold notes, can help align the interests of investors and originators, according to Moody’s Cheng.
“The regulators have been very cautious in developing the securitization market,” he said.
Chinese banks have issued a total of 110.7 billion yuan of loan-backed debt since 2012, according to data compiled by Bloomberg. That contrasts with a record 11.7 trillion yuan of trust assets as of March, according to China Trustee Association data.
“The volume of ABS issuance is still very low, compared with the size of the financial market and the size of shadow banking,” said Vera Chaplin, Sydney-based managing director and lead analytical manager for structured finance ratings in the Asia-Pacific region at Standard & Poor’s. “It’s unlikely it will be a cure at this time. But if it’s successful, it certainly will aid the financial market reform as there is more need for transparency.”
Central bank Deputy Governor Liu Shiyu said at a national People’s congress standing committee meeting the government will accelerate securitizing loan assets and make full use of outstanding loans, the China Securities Journal reported on June 25.
The government in May ordered lenders to curb interbank borrowing as one of its latest effort to staunch shadow-banking growth that data yesterday indicated remains strong. Aggregate financing rose to 1.97 trillion yuan in June, the highest for the month since the lending spree of 2009 and compared with the median estimate of analysts for 1.425 trillion yuan.
The China Banking Regulatory Commission stepped up supervision of the trust industry in April by tightening the approval process for companies seeking to enter new businesses and offer new products.
Speculation mounted that failures could spread after the eleventh-hour rescue in January of a 3 billion-yuan product arranged by China Credit Trust Co. In March, Jilin Province Trust Co. missed payments on a 973-million-yuan product as borrower Shanxi Liansheng Energy Co. underwent restructuring.
The government is encouraging lenders to move away from such financing. Issuance of asset-backed securities this half may exceed the amount for the first six months, according to Victor Wang, an analyst in Hong Kong at Credit Suisse Group AG.
Lenders with with high mortgage, card loans and lending to smaller companies are likely to benefit the most as the ABS market develops, with outstanding bank issuance possibly increasing to 1 trillion yuan within three years, he said.
“ABS can help banks quickly increase their cash turnover,” Wang said. “If they need money, they can pack and sell some loan inventories.”