China's structured finance market will recover slowly in 2023 from a plunge in 2022 as the economic impact of pandemic-related restrictions fades, S&P Global Ratings said in a Feb. 7 report.
The country's structured finance market is expected to grow 4% to 2.10 trillion yuan, or $310 billion, in 2023, a reversal from a 36% fall last year, Ratings said. Issuance momentum for structured finance products in the two dominant sectors of residential mortgage-backed securities, or RMBS, and auto loan asset-backed securities, or ABS, is expected to remain constrained.
"RMBS volumes will remain quiet or experience intermittent issuances, subject to developments in the property market, banks' mortgage loan origination trajectory, and regulatory stance," Ratings said. Issuance crashed by 95% to 24.5 billion yuan in 2022, from 499 billion yuan in 2021, it said.
China's gross domestic product grew 3.0% in 2022, missing the government's aim of 5.5% expansion. The International Monetary Fund expects China's GDP to grow 5.2% in 2023, with a gradual increase in bank lending. Aggregate profits of Chinese banks rose 5.4% in 2022, according to reports in state-backed media.
Property in decline
Although the steep decline in RMBS issuances wasn't expected to pose a serious systemic risk to Chinese banks, lenders have struggled to reach their mortgage origination targets amid weakness in the residential real estate market. Bank of China Ltd., Industrial and Commercial Bank of China Ltd. and Postal Savings Bank of China Co. Ltd. sponsored one transaction each and there has been no fresh RMBS issuance since February 2022, according to the report.
"We think this could be attributed largely to China's property market downturn and sluggish mortgage origination. Banks have been struggling to reach their mortgage origination targets," according to the rating agency. Any meaningful recovery in RMBS issuance would likely happen only in 2024, though intermittent sales may happen this year.
The agency expects "some volatility" in delinquency rates on the RMBS it rates. Delinquency may increase in the first quarter before gradually improving as the pandemic impact abates, it added.
Auto ABS will remain largely flat in 2023, given the projected 2% increase in sales of light vehicles, Ratings said. Issuance decreased by 17% in 2022 to 218 billion yuan after a 36% surge to 264 billion yuan in 2021, it noted.
Consumer-loan ABS issuance will likely maintain momentum in 2023 after a 24% growth in 2022 due to improving economic growth prospects. Issuance amounted to 24 billion yuan from 18 deals sponsored by 11 originators last year, it said.
As of Feb. 6, US$1 was equivalent to 6.79 Chinese yuan.
