Securitization boom exposes China’s slapdash deleveraging efforts
As China strives to depreciate its economy against excessive debt, emerging markets securitization exploded with funds from private banks, local governments and private companies rush to turn assets into cash.
China’s asset-backed securities market (ABS), a financial instrument through which a broad range of assets, such as loans, real estate, tolls and picturesque parks, were converted into securities comparable to negotiable bonds, a 50% 2016 and now is over 1 trillion yuan (147.1 billion dollars).
However, there are risks of developing signs of this market, which has barely taken off three years ago.
Its first ruling came at the end of last year, when a securitized bridge in Inner Mongolia could not gather enough to pay the investors tolls.
Analysts said some projects were securitizing too optimistic cash flow projections and, in other cases, there was an excessive concentration of risk.
The Chinese media reports have added to this concern by suggesting that the government could soon lower the bar for regulatory infrastructure projects supported by the government to securitise.
“Asset securitization can help companies reduce leverage in a controllable way and support the economy,” said Song Qinghui, an independent economist based in Beijing.
“This is just a financial tool, but in recent years, ABS has been proclaimed heaven in China and the rapid growth of the company itself shares some resemblance to the burgeoning crisis stage in the United States.”
Government securitization, ironically, stands side by side with China’s intense efforts to reduce its huge debt and overinvestment.
It is partly responsible for pushing banks and real estate companies that try to convert future non-liquid loans into their immediate cash balances.
The first group of public-private partnership projects (PPP) in values were earlier this year and included two water treatment projects, a tunnel operator and a heating system.
A second group of projects should start trading in the two major Chinese stock markets, generating 1 billion yuan for local titurent assets.
There can be no more of these PPP securitization projects if the government changes the rules are currently in the projects that have been in operation for less than two years after the securitization.
China launched ABS in a pilot project in 2005 but suspended the market during the global financial crisis of 2007-2008, which was triggered by the collapse of fragile mortgage securities in the United States.
China recovered the issuance of ABS in 2012 and issued a series of policies for the promotion of the company, with the State Council, China Cabinet, asset identification last year as a means to help Chinese enterprises to Reduce leverage.
Financial regulators believe that ABS can help local governments in China manage their huge debt of 15 trillion yuan.
Lin Hua, chairman of China’s Titulization Analytical Consulting warns that these are local governments or with scores below those of China’s poorest regions, such as Guizhou and Shandong, that would exploit the ABS market.
Although in a typical asset securitization structure, a special purpose vehicle that will be set up to isolate the issuer’s solvency from the underlying assets backing the ABS, there is also concern that more and more farm borrowers and credit rating agencies Credit could paint an optimistic picture irréalement cash flow futures securitized assets.
This is the case with the bridge in Inner Mongolia who missed payments after their entrance by toll collapsed due to a drop in coal transport, away from stable cash flows projected by the rating agency China Lianhe Credit Rating Co.