China's securitization market had a slow start in the first quarter of 2023 because RMBS issuance remains stalled and while issuance slowed for auto loan ABS and corporate risk-related asset classes. Uncertainty persists around sector fundamentals of the respective sectors. We continue to expect a mild recovery in issuance volume for the year, and maintain our expectations for about 4% growth during 2023.

S&P Global Ratings believes there are some early signs of stabilization in delinquency trends in the first quarter of 2023. Early delinquency ratios in RMBS and ABS have narrowed compared with end-2022, though the divergence in severe delinquency ratios increased. Nevertheless, we believe our ratings on the auto ABS, RMBS, credit card ABS transactions that we rate will remain stable as China's economy continues to recover.

Chart 1

Yield Trend

Stable overall liquidity because of loosening monetary policies

People's Bank of China announced a 25 basis-point (bps) reduction to the required reserve ratio for financial institutions in March 2023. This reduction followed a 25bps cut to the ratio in late November 2022. One-year and five-year loan prime rates (LPR) have remained at 3.65% and 4.3% respectively during the first quarter of 2023.

The six-month Shanghai Interbank Offered rate (SHIBOR) remained flat in the first quarter at 2.54%, compared with 2.51% as of end-2022. This reflects largely stable liquidity in the market.

Coupons on the most senior tranches of auto loan ABS continued to rise, rebounding to 2.45%-3% during the first quarter of 2023 after bottoming out in the third quarter of 2022. This may indicate rekindled investor demand for securitized assets.

Chart 2

Regulatory Update

Chinese regulator proposes to update rules on auto-finance companies

The China Banking and Insurance Regulatory Commission (CBIRC) published an updated draft regulation, Rules on Auto Finance Companies (for Consultation) (hereinafter referred to as the "Rules"), in December 2022 to solicit public opinions.

Because the revision is still at the consultancy stage, the potential impact from the update of the Rules remains to be seen. Preliminary feedback from some auto finance companies (AFC) indicated no material impact on their current loan origination and underwriting practices.

The proposed revisions put forward tighter requirements on risk management, shareholder investment and corporate governance. Besides, after-sales products such as value-added products are also included in the business scope of AFCs to accommodate market needs. The proposed Rules also allow AFCs to provide leaseback services if they have a track record of authentic trading in automobiles.

Mortgage rates continue to trend down for first-time homebuyers

China established a dynamic adjustment mechanism on mortgage rates for first-time home buyers in January 2023. The dynamic adjustment mechanism allows for the lowering or removal of a floor on mortgage rates in phases for cities where the selling prices of new homes fall month-on-month and year-on-year for three consecutive months. According to the PBOC, 83 cities have lowered mortgage rates as of March 2023.

New Issuance Trends

A slow start to securitization issuance

New securitization issuance decreased by 10% year on year in the first quarter of 2023 to RMB363 billion (US$52.8 billion). The absence of RMBS issuance since February 2022 largely accounted for the decrease. There are also notable decreases in issuance of auto ABS and certain corporate risk-related asset classes such as supply-chain ABS.

We expect the total issuance volume to increase by 4% to RMB2.1 trillion this year, based on our forecast of 5.5% economic growth in 2023.

Chart 3

Positive momentum in consumer loan ABS and MSE loan ABS

Auto loan ABS issuance saw a 33.5% yearly decline in the first quarter of 2023 because auto sales and loan origination remained slow.

There was no RMBS issuance in the first quarter, remaining stalled since February 2022.

Issuance of leasing receivables ABS increased by 7.4% to RMB67 billion from RMB63 billion in the first quarter of 2022. Auto and equipment leasing companies are among the most frequent issuers. This is partly driven by a growing market for financial lease ABS and an incentive for these issuers to diversify their funding sources.

The consumer loan ABS sector maintained strong momentum from second half of 2022. Issuance in this sector grew by 226% year on year in the first quarter of 2023. We expect robust issuance momentum to continue in 2023, given our projections for 5.8% growth in consumption, and investors' seeking opportunities in the absence of RMBS issuance. There may also be new originators tapping the ABS market to raise funds in 2023.

Issuance in micro and small enterprise (MSE) loan ABS also saw solid growth in the first quarter of 2023. Total issuance amounted to RMB11.3 billion, which represents 88% growth compared with the first quarter of 2022.

Chart 4

Chart 5

Auto ABS Issuance

Weak auto sales and loan originations weighed on auto ABS issuance

Auto ABS issuance decreased by 33.4% year on year in the first quarter of 2023 to RMB43.5 billion. Captive AFCs issued eight transactions in the first quarter, down from 12 a year earlier. Lackluster auto sales and loan originations in the period contributed to the decrease.

There was one green auto ABS issuance of RMB2 billion in the first quarter of 2023. While this is lower than the RMB2.5 billion and two transactions recorded in the year ago, continuous growth in this sector is likely due to rising EV loans on the back of more EV deliveries over the next year or two.

We anticipate more first-time originators will come to the market as the number of participants at present is relatively limited. For 2022, five originators issued green auto ABS among roughly 20 repeated sponsors.

Chart 6

RMBS Issuance

Limited visibility on issuance resumption

RMBS issuance has remained stalled since February 2022. Issuance momentum will depend on the pace of a recovery in China's property market, Chinese banks' mortgage origination, and the regulatory stance on mortgage growth and RMBS issuance.

We expect an "L" shaped recovery in China's property market, with sales stabilizing in the second half of 2023 but not taking off with any great vigor. (See "Swap It Out? China's Defaulted Developers Have New Template For Restructurings", published March 1, 2023).

While property sales in China have improved in recent months, the recovery has been uneven and is more tilted to higher-tier cities and properties with better quality. Prices of property in first-tier cities have risen 1%-2% year on year each month in the past three months, while they were largely flat in tier-two cities, and trended down in tier-three cities.

Chart 7

Auto Loan ABS Performance

Severe delinquency gradually narrowing

In terms of all auto loan ABS outstanding, the weighted average M2 ratio (31-60 days in arrears) declined to 0.11% in March 2023 from 0.15% in December 2022. The weighted average M3 ratio (61-90 days past due) also narrowed to 0.07% over the same period from 0.08% in December 2022. Although the M4+ ratio, showing loans more than 90 days in arrears, increased to 0.26% in March 2023 from 0.21% in December 2022, the formation of such loans will likely slow because of the improvement in earlier delinquency ratios.

Some market participants observed an increase in prepayment in the first quarter of 2023. This could be the result of the overall low interest rate level in China which incentivizes borrowers to repay existing loans.

For the auto ABS transactions that we rate, we saw some divergence in delinquencies because we include transactions with distinct pool attributes. These attributes include vehicles backing the loans that are not from car makers associated with originators. Higher credit enhancement mitigates the increased credit risk.

We observed a similar delinquency trend in the auto loan ABS transactions that we rate. M2 and M3 ratios were 0.09% and 0.05% in March 2023, compared with 0.11% and 0.05% in December 2022. This could be an early sign of stabilization in severe delinquency rates, even though the M4 ratios increased to 0.26% in March 2023 from 0.23% in December 2022.

We expect the credit quality supporting the auto ABS transactions that we rate to remain solid in 2023, based on the post-COVID economic recovery in China.

Chart 8

Cumulative default rates remained low

Cumulative default rates as of March 2023 remained largely stable, and overall stayed below 0.5% for 2016 and later vintages.

Comparing default performance across annual vintages, the 2021 vintage followed a similar pattern as 2020, and collateral performance for both vintages outperformed other earlier vintages. The rate increased by 5 bps for the 2021 vintage in the first quarter of 2023, while 2020 or earlier vintages recorded no or minimal change.

Performance of the rated auto loan ABS will likely remain stable because of favorable pool attributes, such as low loan-to-value ratios and higher seasoning relative to the initial loan tenor.

Chart 9

RMBS Performance

Early delinquency ratios of rated RMBS stabilized in the first quarter of 2023

For RMBS transactions that we rate, the early delinquency ratios remained low in absolute terms, but continued to diverge in the first quarter of 2023.

• The M1 ratio (1-30 days past due) decreased to 0.29% in March 2023 from 0.33% in December 2022.
• The M2 ratio hovered between 0.08% and 0.12% in the first quarter of 2023 down from 0.13% in December 2022.
• The M3 ratios hovered at 0.05%-0.08%.

There are some signs of stabilization in delinquency rates as the ratios narrow across the M1 to M3 delinquency buckets. The M4+ ratio (90-plus days in arrears) increased by 12bps to 1.07% in the first quarter of 2023. The increase of the M4+ ratio could be due to the paydown of the underlying pools and the time needed to work out accumulated severe delinquent loans.

In order to better gauge and track the change in credit enhancement in percentage terms as transactions amortize, we have adopted an asset coverage ratio to monitor RMBS that we rate (see chart 11). The ratio measures the number of times current collateral (excluding assets in severe delinquency) could cover the outstanding balance of rated notes.

Since RMBS transactions usually have the lowest credit enhancement level as a percentage at closing, inclusion of a new transaction will cause the ratio to dip at the month of addition.

In general, as transactions continue to repay rated notes, the asset coverage ratios tend to trend upward over time. This indicates a steady build-up in credit enhancement and therefore more cushion to withstand potential deterioration of the underlying pools.

Chart 10

Chart 11

Cumulative default rates for most annual vintages stayed stable

The increase in the cumulative default rates of most of the vintages was minimal, at 2 bps-6 bps in the first quarter of 2023. The cumulative default rate of most of the vintages stayed below 0.85%.

Future asset performance of RMBS will depend on property price movements, regulatory stance, and the strength of China's post-pandemic recovery.

In 2022, cumulative default rates jumped for a few RMBS transactions originated in 2020, partly due to the default of some large size mortgages and the effects of COVID-19. We do not rate these transactions. It is unclear if their asset quality will stabilize amid evolving market conditions.

Chart 12

Prepayment rates trending higher on low interest rates and expected return on investments

The constant prepayment rate (CPR) for bank-issued RMBS transactions fluctuated at 9%-14% in the first quarter of 2023. The prepayment rate ended higher at around 14.3%, partly driven by the low interest rate environment, a lower expected return on wealth management products, and a rebound of repayment applications after the lifting of measures to control the pandemic, in our view.

CPR in the first quarter of 2023 began to move in tandem with the second-hand property sales index after diverging in the second half of 2022. This could be due to increasing willingness of existing borrowers to purchase new homes amid relatively low house prices and declining mortgage rates.

Chart 13

Credit Card And Consumer Loan ABS Performance

Arrears continue to rise due to the lingering economic impact of the pandemic

Due to increased interest in consumer-related asset classes, we have made observations based upon public yet limited transaction performance data from consumer loan ABS issued under the credit asset scheme.

The collateral performance of selected consumer loan ABS continued to deteriorate in the first quarter of 2023. This could be a result of lingering effects after China relaxed its pandemic-control measures.

For some consumer loan ABS issued by top-tier consumer finance companies and banks under the credit ABS scheme (see chart 14), the M3 ratios increased by 45bps-111bps during the first quarter of 2023, compared with a flat movement in auto loan ABS during the same period.

We do not rate these transactions and have no knowledge about the expectation of the performance trend and the structural mitigants. However, the performance we observed during the period is a good indication of the level of volatility in this asset sector.

Chart 14

New Issuances In 1Q 2023

• Generation 2023-1 Retail Auto Mortgage Loan Securitization, March 10, 2023
• Xin Rong 2023-1 Retail Auto Mortgage Loan Securitization, Feb. 24, 2023

Related Research

• A Primer On China's MSE Loan ABS Market, May 10, 2023
• China Auto: Navigating Demand Uncertainty, April 26, 2023
• Economic Outlook Asia-Pacific Q2 2023: China Rebound Supports Growth, March 26, 2023
• A Primer On China's Equipment Lease ABS Market, March 2, 2023
• Swap It Out? China's Defaulted Developers Have New Template For Restructurings, March 1, 2023
• China Consumer Products And Retail: Sales Pick Up As COVID Controls Wind Down, Jan. 13, 2023
• China Structured Finance Outlook 2023: Issuance Likely To Slowly Stir, Jan. 12, 2023
• Global Structured Finance 2023 Outlook, Jan. 11, 2023
• A Primer On China's Consumer Loan Asset-Backed Securities Market, Sept. 2, 2022
• A Primer On China's Residential Mortgage Backed Securities Market, May 24, 2022
• A Primer On China's Auto Loan Asset-Backed Securities Market, April 28, 2022