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Why China Isn’t Worried About a Slowdown in This Lending Market
China’s market for asset-backed securities surged in 2017, led by issuers including Ant Financial Services Group. The firm has temporarily stopped selling securities backed by consumer loans. Photo: Qilai Shen/Bloomberg News
By Manju Dalal,
Shen Hong and
Chuin-Wei Yap
Feb. 11, 2018 7:00 a.m. ET
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An engine of consumer loan growth in China is slowing.
But that might not be such a bad thing, at least for regulators and market participants that have fretted about a rise in risky lending practices over the past year.
China’s market for asset-backed securities—which bundle up car loans, mortgages, consumer loans and other receivables into bondlike products—surged in 2017, led by issuers including the financial affiliate of Alibaba Group Holding Ltd. and other nonbank lenders. Total issuance of such instruments, which are mostly denominated in yuan, jumped 90% to over 220 billion dollars last year from 2016, according to S&P Global.
Increasing demand for consumer financing in China has fueled business growth at many nonbank financial institutions that in turn tapped securitization markets for funding, S&P Global said. The country is now the world’s second-largest market for securitized assets after the U.S., where issuance reached 510 billion dollars in 2017, it said.
In the past couple of months, however, issuance in China of securities backed by unsecured small consumer loans has slowed sharply. This came after Chinese financial regulators took steps to curb a proliferation of internet lenders making microloans, small, short-term loans that typically carry high interest rates. These small loans represent roughly 40% of all consumer loans backing asset-backed securities in the country, according to S&P.
Sense of SecurityChina's securitization market has been growing rapidly, with record issuance lastyear.Issuance of asset-backed securitiesSource: Wind Info
Chinese authorities, who are stepping up efforts to contain risks in the country’s financial system, have been concerned about weak loan underwriting standards and possible predatory lending practices by some firms.
In recent years, China’s securitization market has become a way for banks to raise funds for already indebted borrowers and contributed to a buildup of consumer debt. While regulators want to rein in risky lending practices, they recognize that measured credit growth can help support China’s economic growth.
Around 1.3 billion dollars worth of securities backed by unsecured microloans were issued in January 2018, down from 3 billion dollars in the same month a year ago and versus a peak monthly issuance volume of nearly 7 billion dollars last autumn, according to data provider Wind Info.
Part of the slowdown was due to Ant Financial Services Group, an affiliate of Alibaba that is the country’s largest nonbank issuer of asset-backed securities. In December, it temporarily stopped selling bonds backed by consumer loans.
The company typically extends small loans to people to buy products on Alibaba’s e-commerce websites such as Taobao. It also makes some microloans that are unsecured, meaning that borrowers haven’t specified what they are using the funds for.
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Two Ant subsidiaries issued some 256 billion yuan (41 billion dollars) of asset-backed securities last year, five times the amount they issued in 2016, according to Wind data.
Ant said its December hiatus wasn’t due to regulatory scrutiny of the industry, but that high interest rates made it uneconomical to sell the securities to investors at the time. China’s benchmark, seven-day interbank lending rate hit a four-year high on Dec. 28.
In mid-January, Ant said it was resuming sales of securities backed by consumer loans and planned to introduce other kinds of asset-backed bonds. Ant also recently announced plans to increase the registered capital of two consumer lending units, signaling they will be lending more in the future. The firm hasn’t specified what other types of securities it is considering.
A January report from Moody’s Investors Service said issuance of securities backed by internet-based microloans has declined since new Chinese regulations were introduced. The ratings firm said the new rules “explicitly prohibit” certain types of loans from being included in asset-backed bonds, such as cash loans, student loans and loans used to finance down payments. That, Moody’s said, should over time improve the quality of securitized loans, a positive for investors.
Securitization was first allowed in China back in 2005 but was banned after the 2008-2009 global financial crisis due to regulators’ concerns about the risks involved. A crash in the U.S. housing market led to a collapse in the prices of securities backed by home loans to people with weak credit histories, leading to heavy losses for many banks and investors around the world, including in Asia.
Since 2013, Beijing has again encouraged the growth of China’s securitization market partly because the practice helps lenders such as Ant and other financial institutions make more loans that can bolster economic growth. Selling asset-backed securities offers a way for companies to shift millions of dollars of loans from their balance sheets to investors, while raising new funding and creating space to make more loans to old and new customers.
Despite the recent slowdown in sales of bonds backed by microloans, analysts expect China’s securitization market to keep growing. Asset-backed securities in China typically yield over 5% annually, and underlying loan default rates have so far been very low, they note.
Part of the reason: rising household incomes in China and the fact many of the loans are short term. S&P in late January predicted overall issuance may increase “moderately” to around 240 billion dollars of new securities in 2018.
The financial arms of foreign auto companies such as BMW AG , Ford Motor Co. and Volkswagen AG all issued securities backed by Chinese auto loans last year, and this segment of the market has held steady and is expected to grow this year.
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