Credit Asset Securitization In China:Analysis Of Determinants And Implications

Credit Asset Securitization in China has evolved into a steady growth stage.By the end of 2016,market size of credit asset-backed securities has surpassed six-hundred billion Chinese Yuan,the annual issuance reached nearly four-hundred billion Chinese Yuan.However,since the "trial reboot" in 2012,the growth of issuance of credit asset-backed securities has not been smooth.In 2013 and 2016,the growth of issuances experienced"speed bumps",having both declined from previous years'respective numbers.While the decline in 2013 could be explained by the policy effects spilled over due to the "trail"period,the decline in 2016 could be a sign of negligence or indifferences expressed by the market.As an important structural financing tool in developed financial markets,credit asset securitization seems to have a difficult time to "fit in" Chinese financial market.Could it be that credit asset securitization has lost its magic in attracting banks to practice?What positive outcomes could credit asset securitization accomplish under raising pressures of an economic downturn(that Chinese economy is currently facing)?To manage to answer these two questions,this dissertation set out to explore the determinants and implications of credit asset securitization in China.The target is to find out why do banks securitize,what effects or implications could be brought by credit asset securitization to banks and to the financial market and to the stakeholders in the financial system in general.By all means,all analyses should point to the directive of understanding the potential contributions that credit asset securitization could make in promoting the continual growth of Chinese economy.Through the seven chapters of this dissertation,the basic theories and literatures of asset securitization are reviewed,experiences from international practices are compared,and the Chinese specific characteristics observed in practices are analyzed and summarized.Empirical methods are applied on both of the determinants study and the implications study from the viewpoint of bank stability.Build on these fundamental studies,this dissertation further expands the micro-level perspective to a meso-level perspective,research the implications of credit asset securitization to other stakeholders in the financial market.In addition,the prospect contributions of credit asset securitization in supply-side structural reform are discussed.Further policy suggestions are presented upon the conclusions of this dissertation.As follows is a brief lay-out of the structure arrangements of this dissertation along with the summaries of each chapter:The first chapter is the Introduction.The second chapter is the Concept,Theory and Literature Review.The major academic contributions of this dissertation are presented in the third through seventh chapter.The third chapter is the Review and Comparative Study of Domestic and International Practices.Each stage of the "Trail" and the evolvement path of regulation policies regarding credit asset securitization is listed.The lasted market data is summarized and analyzed.Through comparative study,it is revealed that the main differences between domestic and international practices of credit asset securitization are in the following areas:the type of asset-backed securities,the structure of these securities,the underlying assets,the trading mechanism,the laws and regulation environment,etc.The Chinese financial system and banking industry are both different from their international counterparts.It is discovered that Chinese credit asset securitization has its own characteristics.However,whether banks are enthusiastic in practicing credit asset securitization is questionable.There are four major hypothesis of the reason why banks securitize:the liquidity hypothesis,the profitability hypothesis,the risk management hypothesis,and the regulatory capital arbitrage hypothesis.Asset securitization is primarily known for its functionality as a liquidity providing tool to banks in developed financial markets.However,the liquidity shortage problems that some foreign financial markets once faced are less apparent in current Chinese financial market.Thus,liquidity hypothesis may not be the reason for Chinese banks to securitize.Nevertheless,under current liberalization of interest rates environment,bank profitability is squeezed.The profitability hypothesis could be a potential attractive reason for banks to securitize.In addition,since the alliviated regulation guidelines on risk-retention behaviors published in Dec.2013 left room for regulatory capital arbitrage opportunities,this hypothesis has become feasible and attractive to banks.Therefore,in order to test the above hypothesis,in chapter four,further Analysis of the Determinants of credit asset securitization is completed with empirical methods.The analysis shows that Chinese commercial banks practice credit asset securitization upon the profitability hypothesis and regulatory capital arbitrage hypothesis.The liquidity hypothesis is not supported.During the observation period,the banks with lower capital ratios,lower profitability,and better liquidity both practiced more credit asset securitizations.Those banks wish to expand profitability channels,reach greater area of operation,optimize income structure etc.through securitization.The less capitalized banks employed more securitization in hope to reform their risk weighted asset portfolio,and thus improve the capital ratios.As to the abnormal behavior that banks with more liquidity also performed more securitization,one potential explaination is that regulatory authorities maintained regulatory guidelines and preferences when issueing approvals during the "trial" period:only those well-managed banks with adequate liquidity were given "green light".Banks enjoyed ample liquidity under loosened monetary environment could also explain this lack of initiatives to securitize.After the determinants study,the research continues onto the implications study.As known,the determinants and implications are connected and matched in general.The potential effects(implications)of credit asset securitization that banks wish to achieve are largely the reasons why banks securitize(determinants).However,during this process,some key elements that concerned the managerial characteristics of specific banks are changed as well.Through securitization,banks actively change their asset portfolio,which implicate changes in their risk profile.Considering that Chinese economy is going through a downturn period,good-quality assets are fewer than usual,it would be difficult for banks to fill their asset portfolio with equal or better quality assets if they were to securitize.Therefore,it is reasonable to assume that risk management concerns are a major factor that inhibit banks to securitize more.In chapter five,the Implication of credit asset securitization in terms of Bank Stability is analyzed with empirical methods.The analysis indicates that this implication differs between banks upon their respective sizes.For larger banks,credit asset securitization could promote bank stability by strengthen risk diversification;yet for smaller banks,the risk diversification effect is limited and credit asset securitization could bring negative impact to bank stability.Given that credit asset securitization connects many other stakeholders in the financial market,it is inadequate to build conclusions on the analysis of micro-level determinants and implications.The research must extend to meso-level to evaluate the related implications of credit asset securitization on the financial market.In chapter six,the research continues on to three major stakeholders in financial market:the banking industry in general,the debtor or borrower,and the investor.From the perspective of banking industry in general,with liquidity in mind,the development path of credit asset securitization under different economic cycles is discussed.Credit asset securitization improves the process of matching financing needs and money supplies in the financial market,meanwhile facilitates chances to lower the financing cost of debtors.In addition,it provides a broader range of investment channel choices to the investors.Considering the supply-side structural reform that Chinese economy is currently experiencing,further implications and potential application of credit asset securitization in the process of "cutting excess capacity,destocking,deleveraging,lowering corporate costs and improving weak links" is discussed.In the final chapter,the analysis in each previous chapter is summarized and concluded.The ideal state of credit asset securitization in Chinese financial market is pictured.The paths to this ideal state is then designed and promoted as the policy suggestions of this dissertation.The key suggestions are listed below.First,the size of credit asset securitization practices need to be expanded.Banks should be encouraged to securitize in purpose of risk diversification;the policies should make credit asset securitization more favorable to banks;and the investor group needs expansion as well.Second,the trading mechanism needs to be perfected.Different trading floors and markets should be connected;a market-making mechanism could be constructed;further steps to strengthen the liquidity of asset-backed securities need to be explored;a potential Government-Sponsored Entity with industry-wise orientations could be constituted.Third,the range of suitable underlying assets should be expanded and more types of asset-back securities should be allowed.Last but not least,disclosure of information needs strengthen works to remain effective and clear,and the tax issues of credit asset securitization need further clarifications.