Chinese asset-backed securities grow like topsy

Asset-backed securities still suffer an image hangover in the west from the days of the 2008 financial crisis. But China’s issuance of the financial products is soaring this year as Beijing places a big bet on securitisation as a salve for its huge credit risks. Though only a few years old, the Chinese debt securitisation market — in which pools of debt like mortgages, auto loans and credit-card loans are repackaged and sold to investors — is growing like topsy. Issuance of securitised assets rose 61 per cent in the first half of this year and could climb to $170bn for the full year, according to research by Bank of America Merrill Lynch.

But are foreign investors ready to dive in? The answer appears to be a qualified yes. Given memories of how the US collateralised debt obligation (CDOs) market imploded 10 years ago, it is not surprising that foreign investors are cautious and generally avoid local issuers.

Nevertheless, car loan asset-backed securities issued by well-known international companies such as Volkswagen, Ford Motor and others are proving popular, analysts said. “Right now in asset-based finance in China, the area that foreign bond investors want to look at is foreign car manufacturers doing financing for auto loans,” said Alexander Batchvarov, managing director at BofA in London. “Currently this is giving a 5 to 8 per cent yield in renminbi. This is not a yield you can get anywhere in European investment grade bonds.”

Effectively, investors are putting their trust in the reputation of the US and European carmakers to ensure that due diligence on loan quality is being observed and transparency standards upheld. So far, while the Chinese economy continues to grow strongly, the rates of delinquency on such asset-backed securities are low, analysts said. Liquidity levels have also been helped by strong issuance. Total auto asset-backed securities issued in the first half of the year hit Rmb60bn, according to Standard & Poor’s.

The Chinese lionise people who are “first to eat the crab” — suggesting outsize rewards for those who take on challenges. At the moment, those rewards are going to investors in carmakers’ ABS. But if China’s economy was to suddenly cool — especially if car sales slowed sharply — investors could find that the crab starts to nip them.

james.kynge@ft.com