In the first of our series on China’s non-performing loans (NPLs) and asset-backed securities (ABS) markets, we examined China’s NPL market and focused on the legal and regulatory landscape and cross-border issues.
In this second part of our series, we explore the regulatory landscape for ABS in China, recent developments and the latest trends in ABS-product offerings. Against this backdrop, we will summarize the channels for foreign investors to access China’s growing ABS market. We will summarize how the Chinese legal framework addresses some common legal issues relating to ABS issuances.
Overview of China’s bond market, of which the ABS market is an important part
China’s bond market is the third largest in the world after the US and Japan. It is made up of China’s Interbank Bond Market (CIBM) and an exchange-traded bond market. As of June 2018, the total amount of bonds outstanding in China’s bond market was RMB
- trillion (USD 11.83 trillion). According to the People’s Bank of China (PBOC) data, China issued bonds worth RMB 40.8 trillion (USD 6.08 trillion) in 2017, up 12.9% from the previous year.
The CIBM is an over-the-counter wholesale market for institutional investors that is regulated by the National Association of Financial Market Institutional Investors (NAFMII) under the supervision of PBOC. It is not accessible by retail investors. The CIBM accounts for over 90% of outstanding value and 80% of trading settlement of the mainland China’s overall bond market. Participants in the CIBM include approximately 10,000 institutional members made up of mainly financial institutions such as commercial banks, securities companies, insurance companies and various types
of investment vehicles such as mutual funds and pension funds. Among these, commercial banks are the most active participants.
The exchange-traded bond market (consisting of the Shanghai Stock Exchange and Shenzhen Stock Exchange) is retail-oriented, and accounts for less than 10% of China’s overall bond market.
Overview of China’s ABS market
China’s ABS market has experienced significant growth in recent years. China now has one of the world’s largest securitization markets. This represents a remarkable turnaround from the tentative stop-start approach to the development of the market for the best part of the past decade.
Securitization was first introduced in China through a pilot program in 2005 and was suspended in 2008 following the onset of the global financial crisis amidst concerns relating to securitized assets. The pilot program in 2012 was introduced with an initial quota of RMB 50 billion (USD 7.45 billion) which was then increased to RMB 500 billion (USD 74.52 billion) by China’s State Council in May 2015. Since then, the market has seen increased issuance volumes, growth in asset classes and structures and greater offshore interest in onshore ABS.