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Chinese Companies Boost Sales of Asset-Backed Securities in 2016

By Dong Tongjian and Wu Yujian

(Beijing) — Chinese companies doubled their sales of asset-backed securities (ABSs) to raise funds in 2016, a time when the central government was trying to boost the slowing real economy by increasing cash flows at companies.

Total sales of these securities in 2016 in China totaled 842.1 billion yuan ($121.6 billion), up 37% from 2015.

But sales in the China corporate sector more than doubled. Companies raised 438.5 billion yuan through the sale of ABSs with underlying assets such as lease and receivables, according to a report by the China Central Depository & Clearing Co. (CCDC). This was an increase of 114.9% compared with a year earlier.

An ABS is a security whose returns come from the cash flows of a pool of often-illiquid assets such automobile loans, receivables and bank loans. It’s a way for a company to monetize its outstanding assets quickly rather than wait for the maturity date of the payments. The securitized products are traded on the interbank market and on stock exchanges in China.

The surge in the sale of these securities was prompted by a series of regulatory documents rolled out by China’s central bank and securities regulator to help prime the economy and further financial reform. ABSs helped companies generate cash through securitizing their aggregate assets and were a relatively new financial product.

Chinese commercial lenders raised nearly 386.9 billion yuan by selling ABSs in the interbank market. This was up by only 4.63%, the report reveals. However, the residential mortgage component was dramatically higher. Residential mortgage-backed securities accounted for about 138.2 billion yuan of ABSs, the report said. That was more than triple the figure in 2015 due to a frenzied property market that continued until a slew of tighter regulatory restrictions were laid out in October.

Coupled with favorable policies supporting asset-backed securities, the scarcity of other profitable investment assets boosted investor willingness to purchase the securities, said Zhang Jiqiang, a fix-income assets analyst from China International Capital Corp. Ltd. (CICC), a Chinese joint-venture investment bank.

Zhang suggested that the shortage of financially rewarding bank loans, except for mortgages, drove down the amount of securities backed by credit assets issued by banks.

For the first time in eight years, China restarted securitizing the nonperforming loans incurred at commercial lenders in 2016 after the market was halted during the global financial crisis.

The clearinghouse reported that six banks issued 14 asset-backed securities backed by nonperforming loans in 2016 worth about 15.6 billion yuan.

The China Banking Regulatory Commission said bad loans had increased to more than 1.49 trillion yuan, with a bad-loan ratio of 1.76%, by the end of the third quarter.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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