Robust issuance in China's securitization market belies the uncertainty that looms. S&P Global Ratings believes the issuance of residential mortgage-backed securities (RMBS)--a key pillar of growth--in the second half of 2021 will depend heavily on the evolving regulatory dynamics.

China has set the green securitization ball rolling. Securitization transactions are likely to have more green elements as time goes by, but the ramp up will be gradual.

Chart 1

Regulatory Update

Green financing is gathering powerful momentum

• Decarbonization is an important theme in China's new five-year plan. To achieve the targets of 18% reduction in carbon dioxide intensity emissions and a 13.5% reduction in energy intensity, Chinese regulators have released several policies to push green financing.
• In May 2021, the People's Bank of China (PBoC), the Development and Reform Commission, and the China Banking and Insurance Regulatory Commission jointly released a unified domestic standard for classifying green bond endorsed projects and guidelines for green project assessment and certification. The release excludes projects related to coal and fossil fuels from the list of eligible projects, and took effect on July 1, 2021.
• On June 8, 2021, PBoC issued new measures to assess banks' efforts on green financing. Both qualitative (20% weighting) and quantitative (80% weighting) indices will be used to evaluate banks' green finance performance. Key indicators such as banks' share of green finance operations and year-on-year (yoy) growth in green finance operations were introduced as important assessment parameters. The new measures came into effect on July 1.
• Driven by these favorable policies, securitization transactions in China are likely to have more green elements.
• We expect the roll out of transactions backed by green assets to be gradual, given it will still take some time for the standards and systems to be developed.

Yield Trend

Auto loan ABS coupons dropped because of ample liquidity

• PBoC lowered the reserve requirement ratio (RRR) for eligible banks by 50 basis points (bps), effective from July 15. The cut in RRR could unleash around Chinese renminbi (RMB) 1 trillion (US$154 billion) in long-term liquidity. Such a measure aims to support real economy recovery and lower corporate financing costs.
• In response to China's continued monetary easing, the six-month Shanghai Interbank Offered rate (SHIBOR) gradually dropped to 2.60%, from 2.80%, during the quarter.
• Coupons on the most senior tranches of auto loan asset-backed securities (ABS) also declined. Coupon rates for some repeat issuances also fell slightly in June.

Chart 2

New Issuance Trends

Rebound in RMBS issuance continued

• New securitization issuance increased 39% yoy to RMB732 billion (US$113 billion) in 2Q 2021. Total issuance in first half (1H) of 2021 reached RMB1.369 trillion (US$212 billion).
• The surge in issuance is largely attributable to the rebound in RMBS, with a yoy growth of 288%.
• Another factor leading to the increase was the continued growth of corporate-related ABS. Some subsectors such as account receivables and notes receivable rights via schemes managed by China Securities Regulatory Commission and China's National Association of Financial Market Institutional Investors, respectively, saw issuance growth of over 100% in the second quarter (2Q). The issuance volume under both regulatory regimes reached RMB527 billion (US$82 billion), an increase of 26% yoy.
• Auto loan ABS maintained stable issuance in the second quarter, almost similar to that in the same period last year. We still expect flat-to-modest growth in auto loan ABS in 2021.
• For centrally regulated consumer loan ABS, the issuance volume was RMB7.6 billion in 2Q. This came to a total of RMB12.1 billion in the first half of 2021, an increase of 11% yoy. The revival of issuance growth somewhat echoed the gradual pick-up in consumer spending and private consumption.

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Auto Loan ABS Issuance

Stable issuance, first green auto ABS issued

• A total of RMB59.9 billion was issued by captive auto finance companies (AFCs) across 13 transactions in 2Q 2021. This was largely flat compared to that in the same period last year. Stable auto loan ABS issuance was mainly supported by frequent originators.
• The first green auto loan ABS transaction, wholly backed by auto loans extended to purchase NEV, was issued in the last quarter. This partly reflected the burgeoning green ABS market in China and increasing NEV sales.
• NEV will remain in the spotlight over the medium term. However, we do not anticipate NEV-backed auto loans to account for a meaningful portion of the securitized pool across transactions during this period.
• More frequent originators made their debut of issuance with revolving structure in 2021. 26% of the new auto loan ABS transactions (six transactions) were issued with revolving structure in 1H 2021, compared to 20% in the same period last year.
• The increasing use of revolving structure was driven by funding efficiency and bank investors' needs. Though the revolving structure extends the tenor of the issued notes, which in turn increases the risk exposure period, features such as amortization triggers, additional eligibility criteria during revolving period and yield supplement, are set up to mitigate such risk.

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Used Car Loans And ABS

Supportive government policies boost used vehicle sales

• The used vehicle industry in China has started to show meaningful growth only recently.
• The sale of used vehicles increased to over 14 million units in 2020, from 9.2 million units in 2014, representing a compound annual growth rate of approximately 9.3%.
• The surge in used car sales was mainly driven by the rapid development of e-commerce platforms and announcement of favorable policies such as tax reduction and simplification of used vehicle registration and trading.
• The used car to new car sales ratio went up to 0.65x in 1H 2021, from 0.39x in 2014. We see room for substantial growth when compared to the U.S. and the U.K. where the ratio was more than 2x and 4x, respectively.
• We anticipate used car sales will grow at a slightly faster pace than that in the past few years, but are less likely to surge in the next two years despite the room for growth.

Chart 7

Securitization of used car loans is progressing at a gradual pace

• Some AFCs plan to, or have already started to, expand into used car financing in light of the growth in the used vehicle sector. In the 16 auto loan ABS we rated over the past 12 months, used car loans were present in four deals, representing on average about 2% of the underlying pools.
• We believe used car loans will increase but won't form a significant portion in pools backing auto ABS in the next two years. Some AFCs intend to maintain the portion of used car vehicle loans in the pool, while some plan to gradually step up used car loan origination.
• In our view, used car loans in China are more susceptible to fraud risk or borrower segment that is different from typical prime borrowers based upon the historical data we observed and feedback from market participants.
• A few AFCs have fraud prevention processes and measures in place to mitigate potential fraud risk. They also tighten financing terms, such as shorter loan tenors and higher down payments, to mitigate credit risk. This said, idiosyncratic risk cannot be underestimated as some AFCs are new to used vehicle financing. Also, it is not unlikely that new types of fraud might not be detected throughout the loan underwriting process.

RMBS Issuance

Uncertain 2H, following an active 1H in 2021

• In 2Q 2021, 17 RMBS transactions totaling RMB129 billion were issued, a yoy increase of 288% in terms of issue size.
• The significant growth was partly due to the low base in early 2020 due to impact from the COVID-19 pandemic. At that time, the issuance dropped by almost 60% yoy compared to that in the first half of 2019.
• The increasing issuance also reflects the need for loan book management. Banks have to comply with the tightening regulations in the property and mortgage markets.
• Nevertheless, RMBS issuance in the second half remains uncertain, largely due to evolving regulatory dynamics.
• On average there were about five RMBS transactions closed per month in the first five months of 2021, but nothing from June to late July. We would not be surprised if RMBS issuance momentum faces some headwinds in the next two to three quarters.

Chart 8

Auto Loan ABS Performance

Asset performance improved as delinquency rates declined

• Delinquency rates slightly slid down during 1H 2021 as economic recovery sustained.
• The weighted average M2 (31-60 days past due) and M3 (61-90 days past due) ratios for all outstanding auto loan ABS transactions both dropped, to 0.08% and 0.04%, respectively.
• The auto transactions we rate maintained low delinquencies. The weighted average M2 and M3 ratios of these rated transactions remained at 0.05% and 0.03%, respectively, in June.

Chart 9

The cumulative default rate stayed low

• The cumulative default rates were largely similar to that in 1Q 2021 and overall stayed low.
• For 2019 and 2020 vintages, the rate increased marginally by 3 bps-5 bps at the end of 2Q, attributed to the broadly stable collateral performance.
• We expect the economic recovery and favorable pool attributes, such as low loan-to-value ratios and higher seasoning relative to the initial loan tenor, to underpin the steady performance of auto loan ABS.

Chart 10

RMBS Performance

Rated RMBS pools post stable performance

• For our rated RMBS transactions, the delinquencies of M1 ratio stayed low at around 0.24% at the end of 2Q 2021.
• The M2 and M3 ratios remained below 0.1%.
• The M4+ ratio (90+ days past due) has inched up, reaching 0.58% in 2Q, given it takes time to work out severe delinquent and defaulted mortgage loans as our rated transactions became more seasoned over time.
• We assessed the time required to work out the defaulted loans in one of our rated 2018 RMBS transactions. The observation is still limited because there are less than 40 defaulted loans being fully repaid according to the trust reports.
• Based on the very small sample pool from the trust reports, we estimate the time required from overdue to fully recovered to be 18-24 months.
• We expect the time required for workout to gradually increase as the transaction becomes more seasoned. It might still be a while before we see such figures plateau.

Chart 11

Minimal increase in cumulative default rates

• The increase in the cumulative default rate of most of the vintages was minimal at 4bps-6bps as of the end of 2Q 2021.
• The cumulative default rate of most of the vintages stayed below 0.7%.
• We believe the asset performance will remain stable, given steady economic recovery and tightened government policies in real estate and mortgage lending.

Chart 12

Prepayment was lowered during 2Q

• The constant prepayment rate (CPR) for bank-issued RMBS transactions was 9%-14% in 2Q 2021.
• We expect the CPR to fluctuate between 8% and 12% in the next 12 months.

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Consumer Loan ABS Performance

Delinquencies dropped slightly

• Given the unsecured nature of consumer loans, the asset performance of consumer loan ABS per Credit Assets Scheme (CAS) tends to be more volatile than that of auto loan ABS and RMBS.
• The M2 ratio of the consumer loan ABS we tracked stayed below 1% in 2Q 2021, continuing the downward trend since early this year.
• The M3 ratio was also closely tracking the M2 ratio, hovering at 1%.
• We expect the collateral performance of consumer loan ABS to be largely stable, due to the gradual economic recovery.
• Also, some originators might have placed greater emphasis on asset quality over asset growth. We believe such a strategy transformation helps the collateral performance of consumer loan ABS in the long term.

Chart 14

New Issuances In 1H 2021

• Bavarian Sky China 2021-1 Retail Auto Mortgage Loan Securitization, Jan. 15, 2021
• Generation 2021-1 Retail Auto Mortgage Loan Securitization, March 9, 2021
• Fuyuan 2021-1 Retail Auto Mortgage Loan Securitization, March 19, 2021
• Autopia China 2021-1 Retail Auto Mortgage Loan Securitization, March 24, 2021
• Xin Rong 2021-1 Retail Auto Mortgage Loan Securitization, April 13, 2021
• VINZ 2021-1 Retail Auto Mortgage Loan Securitization, April 13, 2021
• Jianyuan 2021-8 Residential Mortgage Backed Securities, May 20, 2021
• Generation 2021-2 Retail Auto Mortgage Loan Securitization, June 8, 2021
• Bavarian Sky China 2021-2 Retail Auto Mortgage Loan Securitization, June 11, 2021

Rating Actions In 1H 2021

• Autopia 2020-1 Class B Notes Upgraded To 'AAA (sf)'; Rating On Class A1 And A2 Notes Affirmed At 'AAA (sf)', Feb. 10, 2021
• Bavarian Sky China Leasing 2020-1 Trust Class B Notes Upgraded To 'A+ (sf)'; Class A Notes Rating Affirmed At 'A+ (sf)', April 23, 2021
• VINZ 2020-1 Class B Notes Upgraded To 'AAA (sf)'; Rating On Class A1 And A2 Notes Affirmed At 'AAA (sf)', June 18, 2021

Related Research

• The Future Is Increasingly Electric for China's Automakers, Aug. 4, 2021
• Global Economic Outlook Q3 2021: Picking Up Steam, Fueled By Vaccinations, June 30, 2021
• Research Update: China Ratings Affirmed At 'A+/A-1'; Outlook Stable, June 25, 2021
• Economic Research: Asia-Pacific's Recovery Regains Its Footing, June 23, 2021
• Economic Research: China's Cool Consumers Turn To Hot Property, May 25 2021
• Global Auto Sales Forecasts: The Recovery Gears Up, May 11, 2021
• China's Climate Ambition Restrained By Supply Security, April 19, 2021
• China Property Watch: The Margin Slide Is Far From Over, March 31, 2021
• China Auto Industry Is On Track For Healthy Growth, March 9, 2021
• China Structured Finance Outlook 2021: Expect Another Record Year, Jan. 13, 2021
• A Primer On China's Residential Mortgage Backed Securities Market, June 24, 2020