Negative impact from China slowdown on Asia securitization will be generally limited

Moody's on ABS and RMBS

Moody's Investors Service says that China's (Aa3, negative) economic slowdown has a spillover effect on Asia Pacific economies, which can in turn negatively affect the performance of the assets backing securitization deals in those markets.

The impact will vary by country, but will be generally limited.

Moody's expects China's GDP growth to register 6.3% in 2016 and 6.1% in 2017, after reaching 6.9% in 2015.

The restructuring of China's state-owned enterprises and the slower economic growth could lead to a rise in unemployment. However, because the restructuring will likely proceed slowly and cautiously, large scale unemployment will not likely occur in the short term.

"We expect a slight increase in delinquency rates for the underlying loans in Chinese auto ABS transactions, given the slowdown in China's GDP growth," says Marie Lam. "Nevertheless, overall, delinquencies will remain low because of the good loan attributes."

"In Australia, China's slowdown will show a moderately negative impact on the performance of ABS, and to a lesser extent, RMBS," adds Lam.

Moody's report points out that China's slowdown has weighed on the Australian commodities sector, because China is Australia's biggest export market for iron ore, and also an important market for Australia's coal exports. The end of the mining investment cycle has caused unemployment to increase in resource states such as Western Australia and to a lesser extent, Queensland.

This situation is in contrast to the states of New South Wales and Victoria, where the employment market has benefited from a weaker Australian dollar, caused by the decline in commodity prices.

Transactions with collateral concentrated in the resource states will be more negatively impacted than those in New South Wales and Victoria.

As for Japan, Moody's expects that the impact of China's slower growth will be very minimal because of Japan's small 3% export exposure to the Chinese economy. The strong labor market in Japan also supports the performance of assets backing ABS and RMBS.

"On the Indian securitization market, China's lower GDP growth rate will demonstrate negligible impact," says Georgina Lee. "In fact, we expect the Indian economy to grow at around 7.5% in 2016, supporting the performance of assets backing auto ABS deals," adds Lee.

Moody's explains that the majority of auto loans backing Indian auto ABS comprise commercial vehicle loans. Commercial vehicle operators stand to benefit as economic growth accelerates. Consequently, compared with recent years when economic growth was slower, and interest rates, inflation and fuel prices were higher, commercial vehicle operators will find it easier to service their loans in 2016.

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