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China Structured Finance Outlook 2020: Performance To Diverge Amid Flat-To-Modest Issuance Growth


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Summary: FMSbonds Inc. (Series 2020-XF2907); Tender Option Certificates/Bonds


COVID-19 Activity In Global Structured Finance As Of Sept. 18, 2020


Cohen Financial, A Division Of Truist Bank Servicer Rankings Withdrawn

China Structured Finance Outlook 2020: Performance To Diverge Amid Flat-To-Modest Issuance Growth

China's securitization market is expanding to accommodate newer and smaller originators. But the pressure stemming from a slowdown in some industries is unlikely to abate. As a result, S&P Global Ratings expects individual securitization performance to diverge even more in 2020.

A saturating issuer base and the government's policies to contain credit growth in certain sectors will impede new issuance growth. However, consumer finance issuance may continue to shine, supporting market expansion and meeting financiers' demand for funding. But issuances relating to corporate receivables, and to a lesser extent, residential mortgages, may counter the trend.

Issuance Growth Will Stay Flat

We expect securitization issuance to be flat or grow in single digits in 2020. China's macroeconomic slowdown and policy tightening may affect business activities in certain industries. This will reduce the need for corporate receivable-backed funding, and to a lesser extent, residential mortgages. Moreover, after years of strong growth, both the number of issuers and the share of funding through securitization have increased. Such market saturation will by nature limit the issuance growth rate. Although we expect residential mortgage-backed securities (RMBS) and corporate receivables issuance to soften, auto loan, consumer finance, and credit card asset-backed securities (ABS) may strengthen.

The growth in China's new securitization issuance slowed down in the second half of 2019. It recorded the first annual drop in years in the third quarter, falling approximately 9% from one year ago. At Chinese renminbi (RMB) 2.3 trillion (around US$334 billion), full-year issuance was 17% higher than in 2018, primarily due to robust activity in the first two quarters (see chart 1).

Chart 1


We expect RMBS issuance to drop 5%-10% in 2020 considering decelerated mortgage loan growth and consequently less pressure on banks to offload mortgages from their balance sheets. RMBS issuance declined 12% in 2019 due to a significant drop in issuance from the top originators (see chart 2). The increase of repeated issuance from other large banks and first-time issuances from midsize and small banks tempered the fall.

Chart 2


A favorable interest rate environment and rising loan origination will continue to support new issuance in the consumer sectors. Consumer receivables transactions, including auto loans, credit cards, and consumer loans, will sustain the pick-up in issuance last year. Auto loan ABS issuance, for instance, came back strongly from that in 2018, with new issuance increasing by 61% in 2019. Repeat issuance from captive auto-finance companies and the participation of new originators lifted the number. Credit card ABS issuance rose 49% as well.

Overall, we expect the issuance in the credit asset securitization (CAS) scheme managed by the China Banking and Insurance Regulatory Commission (CBIRC) and the People's Bank of China (PBOC) to stay flat or decline 5%-10% due to a potential mixed impact from softening RMBS issuance largely offset by issuance from non-mortgage retail sectors.

We expect the combined issuance from the other two regulatory regimes to increase 5%-10% considering the ongoing funding needs of corporate issuers and a saturating issuer base. Issuance in the asset-backed notes (ABN) market, which is managed by China's National Association of Financial Markets Institutional Investors (NAFMII), grew 1.3x last year, from a relatively small base. Growth was also thanks to increasing auto lease, general lease, and corporate receivables issuance. The exchange securitization market, managed by China Securities Regulatory Commission, showed similar market dynamics as in ABN and highlighted the strong demand for short-term corporate receivables issuance.

Origination And Interest Will Hinge On Industry Dynamics

Auto ABS

Passenger vehicle sales in China fell two years in a row: 9% in 2019 and 4% in 2018. Auto finance, however, did not slow down during this period. Captive finance companies have increased their support to vehicles sales through more loans, and many non-captive finance companies such as lease firms also ramped up their participation in financing both new and used cars. This resulted in higher finance penetration. We believe the penetration rate for captive finance companies increased to 45%-50% in 2019, from 35%-40% a year ago.

We expect greater competition and an increase in the origination amount in auto securitization this year. That's because new vehicle sales are likely to stay sluggish and financing expansion shows no signs of slowing. Securitization issuance supporting these activities may rise as well.

Credit card and consumption receivables ABS

Credit card and consumption receivables are rising quickly in China due to strong consumption and increasing use of these payment instruments. The government announced an 8% growth in social consumption in 2019 (which will be 9% if excluding the weaker auto sector), which is once again higher than the expected real GDP growth. Online shopping, which is highly related to the use of credit cards and "buy now-pay later" schemes, grew over 20% and now represents more than 20% of all consumer products and services. The outstanding usage amount on credit cards had increased 10.3% in the first nine months of the year. These growth numbers all point to increasing need for consumer financiers' funding, especially for non-bank operators that cannot take retail deposits. Even for banks, efficient and cheap funding for specific businesses remains an important target for management.

We saw wider participation of consumer finance companies in the securitization market last year, and banks' credit card receivables ABS starting to include non-instalment loans transactions. We expect this expansion to continue in 2020, particularly in credit card ABS.


The slowing new mortgage loan originations in response to policymaker's cooling measures for the housing market directly resulted in the drop in RMBS issuance from some major banks in the second half of 2019. Reversing from the concentrated issuance trend in 2018, RMBS however attracted many new issuers and repeat issuance from previously less active banks in 2019. This change in the issuer composition underpins our view of RMBS' increasing viability as an effective funding and balance sheet management tool for banks, similar to that other more established markets in Asia-Pacific. However, residential mortgage activities remain highly sensitive to government policies and the volatility in RMBS issuance will continue in 2020.

Issuance sponsored by corporate sectors

Corporates in China continued to contend with restricted funding channels last year. Both entrusted loan and trust loan amounts shrank although bonds issuance has recovered. As an alternative, many corporates turned to securitization to fund working capital, particularly through receivables to the down-stream companies and finance leases. We expect the trend to continue.

Some Sectors Could Step Up Efforts To Attract Offshore Investors

The interest in China securitization notes from offshore investors is increasing. Diversified-pool transactions from auto, residential mortgage, consumption, credit card, and certain leases were among many sectors that elicited the most interest. Foreign investors mostly attributed their interest to issuers' efforts in tapping foreign and offshore investors, better transparency, a longer history of performance data, and relative return on investment in high-rated securities. The industry's efforts to address questions on stress testing (if the cycle turns), currency hedges, more granular and recent data, and possibility for more tailored offerings will likely generate the next level of interest.

RMBS And Auto Loan ABS Performance May Diverge

Barring the potential impact of the new coronavirus, we are likely to see greater disparity in the performance of transactions from large national banks and small-and-midsize banks. The variance in underwriting skills between these two groups is the primary reason, in our view. Moreover, the breadth of an RMBS sponsor's operating base and the geographic coverage also matters. Generally, an operating base with limited geographic diversification tends to be more vulnerable to regional economic swings than a more diversified one (see chart 3).

Chart 3


We also expect the performance of auto loan ABS to diverge more among transactions. The reasons for the variations will vary, but will generally depends on originators' business strategies in response to the drop in vehicles sales. Some of the responsive actions in loan underwriting and geographic penetration may negatively affect loan performance (see chart 4).

Chart 4


New Rate Framework Could Create Basis Risk

As a step on its path to interest rate liberalization, China's central bank changed the benchmark loan prime rate (LPR) for existing residential mortgages. The central bank has released some in-principle guidelines for the adoption of the new loan interest rate framework. The regulatory guidance on how to determine a loan margin and implementation period are clear for residential mortgage loans. But the details on execution will vary across banks and loan products.

In our view, the rate conversion should not affect the credit performance of existing or new loans, given the interest payment burden is likely to remain generally stable after the conversion. However, it may affect some existing transactions that use PBOC lending rates for note pricing and rate benchmarking initially, due to the expected basis risk between asset return and note payment. The impact of such basis risk would largely depend on the payment arrangements and the seasoning of transactions. For more seasoned transactions, credit enhancement may build up in percentage terms for sequential-payment transactions, providing buffer to potential interest rate mismatch risks.

The Coronavirus Outbreak May Affect Outcomes

Favorable portfolio attributes and conservative deal structures have supported the stable performance of auto ABS and RMBS in China over the past few years. However, the recent coronavirus outbreak is an unknown quantity that could affect deal performance. While it is early days yet, the potential direct and indirect economic impact of the outbreak on China cannot be ignored.

The coronavirus outbreak is an evolving situation. We may reassess our view of issuance and collateral performance in China's structured finance market if the outbreak affects our economic forecast and view on credit conditions in China.

Related Research

  • China Auto ABS And RMBS Must Brace For Coronavirus Impact, Feb. 3, 2020
  • Coronavirus In China: Early Thoughts On The Economic Impact, Jan. 23, 2020
  • New Loan Pricing Framework Increases Basis Risk For China RMBS, Dec. 30, 2019.

This report does not constitute a rating action.

Primary Credit Analyst:Andrea Lin, Hong Kong (852) 2532-8072;
Secondary Contacts:Jerry Fang, Hong Kong (852) 2533-3518;
KY Stephanie Wong, Hong Kong 85225333529;

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