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China Structured Finance Outlook 2021: Expect Another Record Year


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China Structured Finance Outlook 2021: Expect Another Record Year


China's structured finance market set fresh issuance records last year despite the economic shock wrought by COVID-19. S&P Global Ratings anticipates the momentum will carry through to 2021. Corporate securitization is leading the way, as businesses increasingly turn to structured products to diversify their funding channels.

We project overall issuance volume will increase circa 15% to Chinese renminbi (RMB) 3.3 trillion (US$500 billion) in 2021. This follows last year's 23% jump, to RMB 2.9 trillion (US$433 billion).

Activity in residential mortgage-backed securities (RMBS) will likely expand slightly in 2021 after last year's decline; however, issuance will remain below the pre-pandemic level. We expect flat-to-modest growth in auto loan asset backed securities (ABS), supported by low-single-digit growth in auto sales over the next few years and a continuous uptick in the penetration rate for auto loans.

In our view, credit quality in our rated Chinese auto loan ABS and RMBS will remain good, with low and stable delinquency rates.

Economic Rebound Will Support Broader Issuance Trends

Securitization markets should expand in 2021 in line with a post-COVID rebound in the economy, and a deepening of the market for these products. S&P Global Ratings forecasts real GDP growth of 7% in China in 2021. Our forecast assumes a substantial rotation away from property investment, however, amid a clampdown on financing for the sector. This will continue to weigh on the core RMBS securitization segment, nonetheless we expect some recovery in volumes versus 2020.

Table 1

Private Consumption Will Play Leading Role In China's Recovery
S&P Global Ratings economic outlook
2019 2020e 2021f 2022f
Real GDP % 6.1 2.1 7 5
CPI inflation % 2.9 2.8 2.1 2.2
Unemployment rate % 5.2 5.7 5.4 5.1
Note: Unemployment rate shown is the period average. e--estimated. f--forecast. Source: Oxford Economics, S&P Global Ratings.

Recent data point to an improvement in household spending and we expect consumers to run down savings and bring spending back to normal levels, implying real consumption growth of about 9% in 2021 (see "Asia-Pacific Credit Outlook 2021: Comebacks, Setbacks, And Divergent Tracks, Dec. 7, 2020). This is supportive of the broad consumer ABS and auto-loan ABS segment.

Market development is another factor driving momentum in structured-finance issuance. Investors are looking for higher-yielding assets, and sponsors are increasingly willing to tap this funding choice. In the segments we rate--RMBS and auto-loan ABS—performance remains stable but issuance growth has slowed.

Table 2


Auto Sales Recovery Helps Support Auto-Loan ABS

A recovery in China auto sales and deeper loan penetration for car buyers should support flat to single-digit growth in auto loan ABS issuance in 2021. Last year such issuance fell only slightly to RMB194 billion, despite declines in auto sales that we estimate at 6%-9%.

China is showing stronger auto sales momentum than we anticipated, suggesting a different recovery path to that in Europe and North America. We recently upgraded our 2021 sales growth forecast to 4%-6% in 2021, from 2%-4%, on improving consumer sentiment. In our view, China, as the first country to emerge from the pandemic, is the only market that will be able to restore auto sales volumes to 2019 levels by 2022. We still see high growth potential over the medium-to-long term, given the low vehicle-ownership rate in China compared with other regions (see "Industry Top Trends 2021 Global Autos: A Bumpy Road To Recovery From COVID-19", Dec. 10, 2020).

Our expectation on this segment's ABS issuance is also underpinned by a continuous uptick in the penetration rate for auto loans, to 40%-50% of car buyers. The diversity of repeat issuers--with nearly 20 auto finance companies issuing two deals on average annually in the past three years -- supports the steady supply in new issuance in 2021 and going forward.

The issuance growth could be slightly offset by eligible originators' increasing adoption of revolving structures, partly driven by funding efficiency and bank investors' needs. The revolving period is typically one to 12 months. That said, such structures could be subject to regulatory guidance and hence we expect only gradual, rather than dramatic change to the issuance trajectory in 2021.

Risks emerge from idiosyncratic issues amid broadly stable collateral performance

Our rated auto loan ABS continue to demonstrate strong and stable credit metrics. The 90-plus-day delinquency rate of collateral pools in our rated Chinese auto loan ABS should remain at pre-COVID levels of 0.2%-0.3%. They fell back to this level after rising to a peak of 0.4%in the second quarter of 2020. We expect the trend to remain thanks to the economic recovery and favorable portfolio characteristics such as low loan-to-value ratios and higher seasoning relative to the initial loan tenor.

Amid broadly stable collateral performance, risks might emerge from idiosyncratic originators and issues, such as aggressive expansion to lower-tier cities or into the less familiar used-car segment. Another issue is that to boost loan origination last year, some originators have promoted loan products with more flexible principal repayment, such as balloon payments representing a higher percentage to the loan amount. Risks could ensue if such originators attempted to securitize such unseasoned loans, to the extent that they become a significant percentage of the underlying pool.

We anticipate auto loan ABS will remain stable for 'AAA' rated tranches and stable to positive for other investment grade-rated classes ('AA+' through 'BBB-'). This is based on our expectation of stable collateral performance. The transactions benefit from credit enhancements that increase in percentage terms over time as senior tranches are paid down first (i.e., deleveraging).

Tighter Controls On Real Estate Could Alter RMBS Activity

Consistent strong demand for Chinese property contributed to China's economic recovery from COVID. However, officials continue to telegraph concern about surging home prices, resulting in a fresh tightening of real-estate lending rules implemented in January 2021. We expect government controls to exert the biggest influence on the sector in 2021. Average selling prices could drop by up to 5%; this will likely be offset by volume growth in gross floor area, leading to flat overall sales volume (see "China Property Watch: Issuers Go On A Debt Diet", Nov. 12, 2020.)

RMBS activity will likely recover in 2021 but remain below the pre-pandemic level, partly due to flat residential sales. Issuance also is dependent on regulators' guidance in relation to both new loan origination and the balance of loan book for bank originators. Such guidance can fluctuate as conditions and risks are continually assessed.

Another swing factor on issuance could be activity from the growing band of new players in this market. More than 10 small to midsized banks have made their debuts over the past two years, and if they pursue repeat issuance, this could support volumes. The critical factor on volumes remains activity by the top-two deal sponsors. China Construction Bank Corp. and Industrial and Commercial Bank of China Ltd. continue to dominate the market, accounting for roughly 50% of issuance in the past two years.

Basis risk casts shadow over otherwise solid, well-structured RMBS pools

On the credit side, we expect our rated RMBS pools to post stable performance in light of a steady economic recovery and favorable pool characteristics. The 90-day-plus delinquency ratio has inched up, given it takes time to work out mortgage loans; however, the ratio remains below 0.6%. For our deals rated since 2018 and 2019, the weighted-average current loan-to-initial value ratio is 40%-45% with around seven-year seasoning. Correspondingly, we expect our RMBS ratings -- at 'AAA' since deal close -- to remain stable. This is due to stable credit metrics, and deal deleveraging providing more credit support as the transaction seasons.

The pressure on our RMBS transactions might come from basis risk following loan prime rate (LPR) conversion. The People's Bank of China (PBOC) required all financial institutions to convert their existing floating rate loans to LPR reference by August 2020. We reviewed the five Jianyuan RMBS we rated in 2018 and 2019 after the conversions completed, and affirmed the 'AAA' status based on our rating stress assumption of the LPR. We reviewed because these deals are now exposed to a new type of basis risk. Among the transactions, the class A-1 and A-2 notes (and A-4 if issued) are paying fixed interest rates, while the class A-3 notes pay as per the PBOC five year-plus lending rate. Since the underlying mortgage pools have switched to the LPR, the deals would be susceptible if: (1) the LPR drops; (2) the PBOC lending rate remains unchanged or drops at a slower pace than the LPR; (3) and the PBOC lending rate-based notes are still outstanding.

Chart 1


Further Mild Growth For Broad Unsecured Consumer ABS Issuance

We estimate broad consumer ABS volume will be flat or rise at a mild rate in 2021. The pace will lag overall private consumption growth, in our view, due to a tightening regulatory stance toward small-ticket consumption loans.

Our defined unsecured consumer ABS encompasses transactions backed by unsecured consumer loans originated by banks as well as centrally regulated consumer finance companies, small-ticket loans (most of which, if not all, are extended to individual by finance companies regulated by local governments), and receivables originated via credit cards issued by banks.

With respect to subsectors, small-ticket consumption loan ABS issued in the exchange bond market is the main subsector. It is hard to estimate issuance volume and trends given the opaqueness of the information in relation to the underlying assets. This issuance of the sub-sector peaked in 2017 amid a boom in consumer finance but has softened due to regulatory tightening on online lending since then. Centrally regulated consumer loan ABS volume slumped 20% last year to RMB18 billion. We expect mild growth over the next one to three years thanks to consumption growth.

We estimate credit card ABS plummeted 80% to RMB19 billion in 2020. However, in our view, the issuance in credit card ABS segment appears opportunistic and could be a swing factor in 2021.

Corporate-Related ABS Issuance Momentum Remains Strong

Our defined corporate-related ABS consist of transactions backed by financial assets such as trade receivables, corporate loans, certain lease receivables, etc. The issuance volume soared 50% to RMB 1.5 trillion in 2020. This followed nearly 40% growth in 2019. The rapid growth can be in part attributed to over 300 new entrants tapping the ABS market. Most of these are factoring companies. The main sub-sector is trade-receivables ABS issued in the exchange bond market. We expect strong issuance momentum to continue in 2021 in light of a steady economy recovery and the need for funding diversification.

Why Delinquencies Are Likely To Stay Low

Our rated auto loan ABS and RMBS continue to exhibit healthy and stable performance. The 90 plus day delinquency rate for our rated transactions remained below 0.6% amid the volatility caused by the coronavirus pandemic. Several factors underpin the sound performance. The diversified nature of the underlying pools in our rated transactions and favorable pool attributes, such as a low weighted average current loan-to-value ratio and long weighted average loan seasoning, are key pillars of stable performance in our rated auto loan ABS and RMBS in China.

Potential Impact Of COVID-19

As vaccine rollouts in several countries continue, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects. Widespread immunization, which certain countries might achieve by midyear, will help pave the way for a return to more normal levels of social and economic activity. We use this assumption about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Related Research

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 (852) 2533-3529;

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