China expands asset securitization to boost real economy

BEIJING - China is expanding its asset securitization pilot program so that banks can channel more money to areas where it's most needed.

Credit asset securitization (CAS) worth 500 billion yuan ($81.8 billion) is in the pipeline, according to a statement released after a State Council executive meeting on Wednesday.

CAS is a process where banks' credit assets with poor liquidity and predictable income are sold in the form of securities in the capital market to generate liquidity and redistribute capital.

Money generated from the scaled-up CAS operation will be mainly used in refurbishing rundown housing, water projects and extending railways in central and west China, the State Council said.

Securitization in China officially started when financial regulators launched a pilot program in 2005, allowing banks to package loans into tradable securities.

The program gained little traction in the first few years and was shelved with the onset of the global financial crisis in 2008 as products like mortgage-backed securities were blamed for causing havoc.

However, CAS in China has grown rapidly since the pilot program was restarted in 2012, on the back of government encouragement in the shape of more policy support that has streamlined operations. For example, a registration-based issuance replaced the previous troublesome deal-by-deal approval system.

There is increasingly wide recognition that securitization can revitalize existing assets to address corporates' funding needs, offer investors more investment choices and contribute to the government's goal of developing a multi-tiered capital market.

China's securitization boomed last year with issuance amounting to more than 300 billion yuan, more than double the combined total of the previous years.

Experts have said that China's securitization market is still in its infancy with ample growth potential.

At 300 billion yuan, the market accounted for a tiny 0.5 percent of China's GDP last year, a far cry from 60 percent in the United States and 22 percent in Britain, and trailing behind Japan's 3.6 percent, statistics from the China International Capital Corporation show.

"With the experience accumulated from the pilot program, the government's move for expansion will let securitization play a bigger role in activating assets and improve resource redistribution," said Ji Zhihong, head of the financial market arm of the People's Bank of China.

Ji called for effort to make investors more comfortable with the securitization market, citing the relatively complicated nature of asset-backed securities (ABS).

"Timely information disclosure and an improved rating mechanism should be in place so that investors can better assess the risks in ABS products," he said.