ABS and Deleveraging in China

CHINA ADVISORY - Report 19 Oct 2017 by Andrew Collier

• Explosion in ABS. By the end of September, there were 1,129 ABS securities with an outstanding balance of Rmb1.5trn. Encouraged by government policies, we estimate ABS will grow by double digits through 2020.
• Fiscal “Band-aid.” The central government has retreated from using fiscal resources to solve banks’ NPL problems. Instead, Beijing is encouraging the market to digest NPLs through securitization and debt-to-equity swaps, pushing fiscal debt on to consumers. Beijing is thus encouraging deleveraging of corporates and banks while increasing overall debt.
• Financing “Gap”: Much of the Chinese ABS market is highly risky because it is providing short-term financing for online platforms that offer high-yield WMPs. Online ABS issuers are using high-interest short-term capital to fund ABS issuance, raising the prospects of defaults. This could cause problems for other ABS issuers.
• Rising Property ABS. Once again, property is among the biggest consumers of ABS. Any downturn in the property market could create systemic problems.

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