China re-launches ABS programme for first time since crisis

The asset-backed securities in question are backed by 49 performing corporate loans with weighted average annual rate of 6.27%

China has re-launched a programme to develop asset-backed securities (ABS) interrupted by the global financial crisis as the government tries to shore up its banking system.

China Development Bank sold 10.166 billion yuan of credit-backed securities on Friday, marking China's first sale of such instruments since the global financial crisis caused such products to fall into disrepute.

The asset-backed securities (ABS) in question are backed by 49 performing corporate loans with a weighted average annual rate of 6.27 percent. They were sold at yields ranging from 4.1 percent to 5.68 percent for five different categories, Shanghai Securities News reported on Saturday.

The loans represent credit extended to 43 borrowers from 16 different industries including oil, railways, coal, metals, paper manufacturing, power generation, transportation and non-bank financial institutions, the bank's prospectus said.

"Regulators choose this time to re-launch the ABS programme primarily to bolster the banking system," said Liu Junyu, a senior money market analyst at China Merchants Bank in Shenzhen.

"Banks need cash to raise their capital adequacy ratio while the weak stock market makes it difficult to raise money there."

Many worry China's giant state-controlled banking sector would be pressured this year and next as a slowing economy drives more borrowers into default, dragging on bank revenues.

The China Banking Regulatory Commission (CBRC) requires major lenders to maintain a minimum capital adequacy ratio (CAR) of 11.5 percent. Other banks need a minimum CAR of 10.5 percent.

The weighted average capital adequacy ratio (CAR) of Chinese banks stood at 12.9 percent at the end of June, up from 12.7 in the first quarter, CBRC data showed.

Analysts said, however, said that Chinese banks need at least a combined 200 billion yuan in additional capital in coming bonds if they can sustain regulatory CAR requirements.

In general, a higher capital adequacy ratio is seen as good for the financial system as lenders have more cash to cover the cost of unforeseen risks, benefiting depositors.

Expansion

China launched a pilot programme for asset securitisation in 2005, and a total of 11 financial institutions sold a combined 66.785 billion yuan worth of ABS in the following three years.

The government subsequently suspended the programme in 2008, in response to concern about the role derivatives based on U.S. mortgage-backed securities played in the global financial crisis.

In May this year, three related regulators issued a joint notice reviving the programme. The People's Bank of China (PBOC), the CBRC and the Ministry of Finance also set in initial quota, allowing banks to issue up to a combined 50 billion yuan in such securities.

The programme has also been expanded, with some local governments and trusts being approved to issue ABS and applications of the financial divisions of corporates being under review, trading sources said.

By the expansion, regulators appear to also want to use ABS to help boost corporate fund-raising directly via the market, so as to reduce reliance on bank loans, as well as to give firms an additional channel to raise money through reviving some static assets, they said.