China is celebrating the 10th anniversary of the global financial crisis with a securitization party.
Products that become a symbol of Wall Street’s unsustainable excesses a decade ago – such as mortgage-backed securities – are surging in popularity with Chinese investors. Just over $100 billion worth of asset-backed securities were issued in the first half of 2018 in China, according to S&P Global Ratings, a 44% year-over-year rise that put the country second, after the US, in terms of world-wide issuance.
Enough differences exist between the US in 2008 and China now to suggest this won’t be corner of markets that brings the global financial system to breaking point. That doesn’t mean there’s no cause for concern.
The growth of asset-backed securities is one consequence of broader trends in Chinese banking. Regulators have focused over the past year on forcing banks to take things back onto their balance sheets, such as wealth-management products they sold to customers. Securitization is a legitimate way for them to reverse the trend by hiving off assets – creating room to make still more loans. Nearly $30 billion of mortgage-backed securities were issued in the first half, more than in all of 2017, almost all by major banks such as China Construction Bank, the nation’s biggest home lender.
So far, the surge has come with few alarms. The default rate of mortgages included in most securities remained below 0.75% as of the end of June, S&P says. The vast majority of securitized home loans have been made to borrowers with clean credit histories, the ratings firm says.
Pressure points appear to lie elsewhere. Issuance of auto-loan-backed securities plummeted in the second quarter, a corollary of slowing Chinese car sales. And regulation remains an unpredictable variable: Witness the slump in securities issued by consumer-finance companies after Beijing suddenly tightened standards earlier this year.
Of most concern may be the emergence of securities linked to Chinese property developers. Small suppliers have been able to offload receivables from the likes of China Vanke and Country Garden at a discount to third-party factors, who securitize them and sell them to investors. The arrangement suits the suppliers, who get paid earlier, and developers, who get to pay their debts later.
The risk, of course, is that highly indebted property companies don’t ultimately pay up. If a Chinese housing downturn ever materializes, it’s here the pain in its securitization market could first be felt.
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