Asset Securitization Feasibility And Problems In China

Securitisation is one of the most prominent developments in international finance in the past two decades, and it could assume even greater importance in the future. Securitisation means the issuance of marketable securities backed not by the expected capacity of a private corporation or public sector entity to repay, but by the expected cash flows from specific assets.In particular, several western countries have well-developed markets in asset-related bonds, many of which have been in existence for decades. The most common of these are mortgage bonds, mainly supported by residential mortgages. This technique of securitisation can be used to attain certain objectives, such as improving the management of interest rate risk, increasing efficiency of bank capital for banks, and assessing the rehabilitation of impaired banks.The most widely used assets in securitisation are residential mortgages, credit card receivables, automobile loans and other consumer receivables. These assets are normally found in large homogeneous pools for which historical data can be used to estimate probable default rates.Securitisation enables many kinds of assets to become more liquid in the forms of securities which can be listed on the secondary market. In a typical securitisation project, the originator, usually an entity with outstanding receivables such as loans and payment for goods, transfers its assets to a special purpose vehicle, which is usually a company or trust institution. The SPV will issue ABS through underwriters to investors and the funds raised from the issue will be used to pay the assets.Asset securitisation, a financing tool popular in developed countries, should be introduced to China to fund the country's massive infrastructure construction. It can become a good choice for China's future construction projects and enterprise financing, with more and more domestic banks and enterprises tasting the new business. Securitisation, regarded as an alternative source of financing, also benefits the stimulation of domestic demand, prompts the banking reform in China, raises the capital adequacy ratio of commercial banks, eases credit crunch, and enables the originator to get advance cash flow and so be able to invest in new projects. The corresponding ABS (which is used to mean securities backed by any asset) is a good choice for China's institution investors.Developed since the 1970s, ABS has grown fast in Western countries and securitisation has been applied to an ever-expanding universe of assets. In China, Suzhou Industrial Park, the Zhuhai Expressway and China Offshore Shipping Corp etc have applied the tool to raise funds. Given the vast size of China and the huge number of businesses generating cash flow, the scope for securitisation is almost unlimited, it will have a great future in China. Securitisation is of special significance for China in its transition towards the establishment of real market economy.Concerning the evolution of China's capital markets, the deregulation tide of banking supervision and the preliminary expansion of the mortgage market, it is possible to employ the securitisation technique for the mortgage loans of banks in order to increase the liquidity of the assets. But for the intention to solve the non-performing loan problems of state-owned banks, the cost of employing the technique will outweigh the benefit even if the AMCs try to do it.The establishment of SPV, credit rating and the credit enhancement for the security are all pivotal processes for employing the securitisation technique in China. The AMCs and trust companies can be assigned as SPV, credit rating and credit enhancement technique are crucial procedures inside the securitisation structure for the security to be listed in the capital market and attract more investors.However, there are clearly legal, regulatory and tax issues to be addressed for employing the securitisation technique in China. Such issues must be resolved to facilitate the transfer of banks' asset and subsequent issuance of the...