ASIFMA Handbook Lays Out Reform Steps for China Securitisation Market

Industry body calls for streamlined securitisation framework, permanence of tax exemptions, and relaxation of rules for foreign investment into China’s ABS market.

China’s securitisation market requires reform to open it up to a wider class of investors in order for it to effectively transfer risk from the banking industry to the capital markets.

In the 2018 ASIFMA Asia Securitisation Handbook, law firm King & Wood Mallesons contends that the securitisation market requires a streamlined framework for all companies, doing away with the current distinction between securitised credit assets issued by CBIRC (China Banking and Insurance Regulatory Commission) regulated entities and those issued by CSRC (China Securities Regulatory Commission) regulated entities.

Currently, CBIRC-SPT (Special Purpose Trust) structures are issued by financial institutions like commercial banks, financial leasing companies and auto financing companies. They typically include the entrustment of credit assets to an SPT which form the basis of the receivable pool backing the issuance of ABS (asset-backed securities) in the NIBM (National Interbank Bond Market). These are not open to retail investors.

According to the report, the current legal framework for securitisation in China only permits certain participants and has hindered the “true transfer of risk” between banks and capital markets.

“Despite the explosive growth of ABS issuances in [China], perhaps it is noteworthy that existing laws only permit a limited class of investors to subscribe for ABS issuances adopting the CBIRC-SPT structure. This closed group mainly consists of domestic banks, insurance companies, securities companies and mutual funds. To the extent that credit assets originated by a commercial bank are repackaged into ABS sold to other commercial banks on the NIBM, there is no true transfer of risk. Rather, the situation seems to be more akin to an exchange of risk within the banking industry, with no real offloading of risk to the capital markets.”

Meanwhile, the CSRC-ABSP (Asset-Backed Specific Program) is limited to assets issued by non-financial institutions like independent leasing companies, toll operators, e-commerce platforms and telecom service providers. These structures can be freely traded on the SSE (Shanghai Stock Exchange) and the SZSE (Shenzhen Stock Exchange).

There is also a third category of ABNs (asset-back notes) by non-financial firms in the NIBM, regulated by NAFMII (the National Association of Financial Market Institutions Investors).

The ASIFMA report says that removing the SPT/ABSP distinction would bring uniformity in addressing common legal risks across all securitisation offerings in China.

The report also called for the three-year exemption of withholding and value-added tax on interest income earned by foreign institutional investors from onshore bonds to be made permanent. According to the authors, this move can help facilitate more international investment into the onshore bond market by plugging tax leakages that have hindered the securitisation market from becoming “truly cross-border.”

The current rules for foreign investors to access domestic ABS issuances are “restrictive,” the report says. The rules do not permit direct foreign investment into an onshore trust holding securitised assets.

Regulatory approval is required for cross-border capital flows of this nature and is generally not given for direct offshore investment into an onshore trust. According to a 2015 circular released by the PBOC (People’s Bank of China), foreign central banks, international financial institutions and sovereign funds were allowed, upon registration with the central bank, to engage in bond, bond repo, futures and interest rate swaps trading. In 2016, the PBOC further relaxed rules applicable to foreign institutional investors accessing the NIBM, allowing them to trade any products (including ABS) available on the NIBM.

“To facilitate cross-border foreign investments into an onshore trust holding securitised assets, it will be up to PBOC to promulgate specific regulations allowing this (existing regulations do not permit this), subject to some basic requirements that the investment is made in RMB and the investment scope and plan of the trust is mainly focused on asset securitisation. By denominating investments in RMB, this would not attract the additional regulatory oversight on SAFE [the State Administration of Foreign Exchange] and provide a more direct and attractive route for direct foreign investment in domestic ABS issuances.”

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