The People’sBank of China (PBC) has approved the pilot institutions to issue creditasset-backed securities in the inter-bank bond market recently, with ChinaCredit Trust Co. Ltd. allowed to issue credit asset-backed securities up toRMB4.3 billion yuan and CITIC Trust & Investment Co. Ltd. allowed to issueindividual home mortgage loan-backed securities up to RMB3.1 billion yuan.Originators of the two securities are the State Development Bank and ChinaConstruction Bank respectively, who transferred their own credit assets tospecial purpose trusts for the trustees to manage accordingly. The trustee ofthe special purpose trust shall issue beneficiary securities in the form ofcredit asset-backed securities in the inter-bank bond market, the securities’principals and interests to be paid for with the cash flow originated from theunderlying assets. As a result, the pilot securitization of credit assets hasentered into the issuing stage.
Many agencies,including the PBC, worked together to make pilot securitization of creditassets a reality, under the leadership of the State Council. In 2004, the PBCand China Banking Regulatory Commission (CBRC) studied important issuesinvolved in asset securitization, such as the special purpose trust, securitiesissuance and information disclosure etc. In March 2005, under the leadership ofthe State Council, 10 government agencies, namely the PBC, the State Developmentand Reform Commission, the Ministry of Finance, the Ministry of Labor andSocial Security, the Ministry of Construction, State Administration of Taxation,the Legislative Affairs Office of the State Council, CBRC, China SecuritiesRegulatory Commission and China Insurance Regulatory Commission jointly set upa Coordinating Group for pilot securitization of credit assets to organize andcoordinate the pilot project. The Group conducted in-depth research and discussionon supporting policies in accounting, taxation, investment. On April 20, 2005, Administrative Rules for PilotSecuritization of Credit Assets was issued jointly by the PBC and CBRC toregulate relevant issues in pilot securitization of credit assets and clarifythe supervisory responsibilities of the PBC and CBRC. Accordingly, the PBCshall supervise issuance and trade of the asset-backed securities in theinter-bank bond market in line with the Law of the People’s Republic ofChina on the People’s Bank of China, while the CBRC shall supervisebusiness activities of relevant institutions on securitization of credit assetsin line with the Law of the People’s Republic of China on Banking Regulationand Supervision. After the two pilot banks were approved by the CBRC toconduct securitization of credit assets, the two trustees of the above twopilot banks were approved to issue asset-backed securities by the PBC.
Securitizationof credit assets helps further deepen bond market, develop financial market,maintain financial stability and address challenges arising from financialopening up.
First, It isconducive to correcting maturity mismatch between deposits and credits of thebanking sector, increasing asset liquidity and accelerating turnover of creditfunds. Through securitization of the large value, low turnover and high qualitycredit assets, commercial banks can transform low liquidity assets into liquidones and accelerate funds turnover. Such activities will not change bank’saggregate liabilities, but a commercial bank can effectively improve itsasset-liability structure to strike a balance among profitability, liquidityand safety in asset management.
Second, it ishelpful to increase the capital adequacy ratio of commercial banks. Throughsecuritization of credit assets, commercial banks can move some risky loans outof their asset-liability statement, reduce total amount of risky assets andimprove capital adequacy profile, despite the lack of recapitalization channel.
Third, itpromotes risk redistribution. Securitization of credit assets allows commercialbanks to issue a variety of tradable securities in financial markets,decentralize the credit risks to securities market and reduce non-systemicrisks of the credit assets.
Fourth, it helpsdevelop capital market. Assets securitization can provide liquid, low risksecurities with stable return in various types as new savings-substitute tools.Asset securitization will play an active role in distributing the persistentlyhuge amount of unutilized savings in recent years, promoting the development ofdirect financing and a multi-layered capital market, including a bond market.
Fifth, it helpsfinancial institutions to adapt to opening up. According to China’s WTO commitment, its domesticfinancial sector will open up in full scale to foreign competitors in 2006.Therefore, promoting asset securitization, on one hand, will improve commercialbanks’ asset & liabilities management and enhance financial stability; onthe other hand, it will help domestic financial institutions develop expertisein assets securitization business so as to cope with competition stemming frommarket openness in the near future.
The two approvedasset-backed securities for issuance are the first to be issued by the twopilot institutions.
