China's new securitization growth continued in the third quarter (3Q) of 2021 amid some headwinds from regulatory shifts. The issuance of residential mortgage-backed securities (RMBS) resumed in August, following a break in the previous two months. However, uncertainty looms given the changing conditions in the property sector and the broader economy.

Green asset-backed securities (ABS) made their appearance against a backdrop of supportive government policies. Though issuance has been limited so far, S&P Global Ratings expects green ABS issuance will pick up in the coming decade.

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Regulatory Update

Green development is the main theme

• Decarbonization is currently China's top development strategy. To achieve the country's green goals, the People's Bank of China (PBoC) is developing a green finance framework. After the release of the domestic green bond catalogue, China and the European Union are developing a common catalogue of sustainable finance.
• The PBoC is also stepping up the establishment of a structural monetary policy tool to support reduction in carbon emissions.
• On Oct. 26, 2021, the State Council unveiled a working guidance for carbon dioxide peaking and carbon neutrality in full. The new energy vehicles (NEV) segment has been highlighted as one of the strategic sectors. Favorable policies such as preferential tax policies and government investment support will be provided for NEV manufacturing and research.

China to charge property tax in certain regions

• On Oct. 23, 2021, the Standing Committee of the National People's Congress authorized the State Council to pilot property tax reforms in certain regions. Property tax should be levied on all types of residential and non-residential property in pilot areas, while lawfully owned rural homesteads and houses built on such properties are excluded.
• The move aims to facilitate the steady and sound development of China's property sector. Shanghai and Chongqing have already served as test beds for property tax since 2011.
• The impact of the introduction of property tax to the property and mortgage market is unknown because it ultimately depends on the specifics of the rates and exemption criteria.

Yield Trend

Auto loan ABS coupons may have seen the bottom

• After the cut in the required reserved ratio in July, which has released around Chinese renminbi (RMB) 1 trillion (US$154 billion) long-term liquidity, the PBoC emphasized that China will maintain balanced liquidity supply in the fourth quarter. The central bank has rolled over several medium-term lending facilities through 3Q 2021.
• In response to China's steady monetary easing, the six-month Shanghai Interbank Offered rate (SHIBOR) dropped to 2.47%, from 2.60%, during the quarter. From October, SHIBOR began to inch up and was back to 2.54% in early November.
• Coupons on the most senior tranches of auto loan ABS also followed the trend. Coupon rates were 20-40 basis points lower for repeat deals newly issued in 3Q.
• Based on the month to date data, the coupon rates seem to have hit the bottom. This said, we don't expect coupon rates to spike because PBoC plans to main balanced liquidity supply in the fourth quarter.

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New Issuance Trends

Positive growth but headwinds from regulatory shift

• New securitization issuance increased 5% year over year (yoy) to RMB783 billion (US$121 billion) in 3Q 2021. Total issuance in the first nine months of the year reached RMB2.20 trillion (US$341 billion).
• The increase in 3Q has been mild compare to that in the first half of 2021 (47% yoy) due to the relatively higher base last year from the accelerated economic recovery from COVID-19.
• RMBS issuance still grew by 9% yoy. No RMBS deals came to the market in June and July.
• Issuance via scheme managed by the China Securities Regulatory Commission (CSRC) decelerated in 3Q. Restriction of credit to the property market has been weighing on some subsectors such as supply-chain ABS, which is one of the alternative fund-raising channels for property developers. The spate of regulatory actions on various sectors in the past few months also loomed over the issuance of some corporate-related ABS. The issuance volume under CSRC in 3Q was almost flat compared to that in 2Q, at RMB426 billion (US$66 billion), lower than about 30% growth quarter over quarter in 2020.
• Auto loan ABS issuance grew a strong 47% yoy in 3Q.
• For centrally regulated consumer loan ABS, the issuance volume was RMB7 billion in 3Q. This came to a total of RMB19.1 billion in the first three quarters of 2021, an increase of 16% 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

Strong momentum, two green auto ABS came to market

• A total of RMB59.1 billion was issued by captive auto finance companies (AFCs) and bank across 14 transactions in 3Q 2021, a yoy growth of 47%.
• Auto loan ABS maintained strong momentum despite the supply chain disruptions leading to a declining auto sales yoy since May this year.
• Issuance was supported by frequent originators as most of them made their second or third issuance of the year in this quarter. ABS has become a more regularly used funding channel for these AFCs.
• After the debut of green auto ABS in the past quarter, two new transactions originated by an AFC and a bank came to the market in 3Q.
• As green auto ABS is still in its early stage, issuance volume has been minimal so far. The three transactions issued this year accounted for 1.7% of the auto loan ABS issuance in the first three quarters.
• Some of the features of the green auto ABS: Underlying assets are 100% backed by new energy vehicles (NEV); Issuance size is generally smaller at RMB100 million-RMB2 billion compared to RMB3 billion-RMB10 billion for non-green auto ABS; and All the subscription funds will be used in granting loans for NEV purchase or green projects (in the case of bank originator).

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Green Securitization In China

Green ABS makes its appearance against a backdrop of supportive government policies

• Along with the development of green bond in China, the policy support for green asset securitization was first mentioned by the State Council in 2015.
• Then the regulators, including CBIRC, PBoC, CSRC, and the National Association of Financial Market Institutional Investors (NAFMII) started to develop practical guidelines for the green ABS/ asset-backed note (ABN) products they manage. In general, regulatory requirements on issuance of green ABS substantially draw upon the practice of green bond issuance.
• Considering China's strong commitment to decarbonization, we expect the green ABS issuance to boom in the coming decade, driven dually by supporting policies and market demand for green assets.

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Table 1

Case study: Gongyuan Zhiyuan 2021-1 Vehicle Installment Green ABS

The profile of one the green auto ABS issued in China is as follows:

• Transaction name: Gongyuan Zhiyuan 2021-1 Vehicle Installment Green ABS (we do not rate this transaction).
• Originator: Industrial and Commercial Bank of China Ltd. (ICBC)
• Issuer: CCB Trust Co. Ltd.
• Issuance scheme: Credit Asset Securitization (CAS) scheme managed by CBIRC and PBOC.
• Underlying asset type: Credit card vehicle installment receivables backed by NEV.

Some of the features and highlights of the deal are:

• ICBC issued the first vehicle installment green ABS in September 2021.
• The issuance volume was RMB132 million, with underlying pool of 1,050 loans backed by NEV.
• The underlying assets were backed by a variety of vehicle brands, including Tesla, BYD and NIO and were 100% NEV.
• The compliance of green ABS was evaluated by a third-party.
• This transaction met the "double green" requirements of green ABS bonds--the source of the underlying assets has to be green--NEV, and the use of the subscription funds for investment of green projects.
• Other notable features of the underlying loan pool include the weighted average initial loan tenor of 51 months and remaining loan tenor of 45 months are longer than 30-35 months for initial loan tenor and 25-30 months for remaining loan tenor in a typical auto loan ABS. In terms of loan to initial vehicle value (LTV), the pool exhibits 67%, higher than that of a typical auto loan ABS.

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RMBS Issuance

Issuance resumed in August, uncertainty remains

• In 3Q 2021, 13 RMBS transactions totaling RMB108.4 billion were issued, a growth of 9% yoy but a decline of 16% over 2Q.
• Property sales are slowing in China as policy tightening has taken hold in recent months.
• RMBS issuance was absent in June and July and only resumed in early August. Nevertheless, the first three quarters' issuance still marked a yoy increase of 107%.
• We saw the return of repeated issuance from major players in September, partly reflecting the finetuning of the regulatory dynamics in place.
• RMBS issuance in the next few quarters could remain uncertain, largely subject to the conditions of the property sector and the broader economy.

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Auto Loan ABS Performance

Constant asset performance for the sector, some divergence in our rated portfolio

• Delinquency rates of the overall auto loan ABS sector remained stable in 3Q.
• The weighted average M2 (31-60 days past due) and M3 (61-90 days past due) ratios for all outstanding auto loan ABS transactions stayed low, at 0.07% and 0.04%, respectively.
• The auto transactions we rate have shown some divergence in delinquencies as we started to include transactions with distinct pool attributes. The attributes include vehicles backing the loans not from car makers associated with originators. The increased credit risk has been mitigated by higher credit enhancement.
• We expect the delinquency ratios to continue to go up for a few months before leveling off as more transactions with distinct pool attributes are included in our rated portfolio.
• That said, the weighted average M2 and M3 ratios of our rated transactions remained low at 0.06% and 0.04%, respectively, in September.

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The cumulative default rate stayed low

• The cumulative default rates were largely similar to that in 2Q 2021 and overall stayed low.
• For the 2019 and 2020 vintages, the rate increased marginally by 1 basis points (bps)-5 bps at the end of 3Q, attributed to the broadly stable collateral performance.
• We expect the economic conditions 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.

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RMBS Performance

Rated RMBS pools posted stable performance

• For our rated RMBS transactions, the delinquencies of M1 ratio stayed low at around 0.24% at the end of 3Q 2021.
• The M2 and M3 ratios remained below 0.1%.
• The M4+ ratio (90+ days past due) has inched up, reaching 0.57% in 3Q. That's due to the mixed impact of: (1) declining pool balance as more underlying assets pay down; and (2) the time it takes to work out severe delinquent and defaulted mortgage loans as our rated transactions became more seasoned over time.
• The RMBS we rate in China will not be affected by the likely default of China Evergrande Group. This is mainly because our rated deals are backed by existing homes, and therefore face no construction risk.

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Cumulative default rates rose slightly

• The increase in the cumulative default rate of most of the vintages was minimal at 2bps-7bps as of the end of 3Q 2021.
• The cumulative default rate of most of the vintages stayed below 0.7%.
• A few RMBS transactions originated in 2020 have shown a jump in cumulative default rates in the last six months, largely due to the default of mortgages with higher outstanding balance. We don't rate these transactions. We believe such quick deterioration is likely to be deal specific rather than the start of a sector trend.
• We expect asset performance will remain stable, given the tightened government policies in real estate sector and mortgage lending.

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Prepayment trended down during 3Q

• The constant prepayment rate (CPR) for bank-issued RMBS transactions was trending low in 3Q, at a range 8%-10%.
• We expect the CPR to fluctuate between 8% and 12% in the next 12 months.

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Consumer Loan ABS Performance

Delinquencies lowered

• 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 low at around 0.4% in 3Q 2021, continuing the downward trend since early this year.
• The M3 ratio was also closely tracking the M2 ratio, sliding to below 0.5%.
• We expect the collateral performance of consumer loan ABS to be largely stable.
• 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.

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New Issuances In 1Q-3Q 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
• Autopia China 2021-2 Retail Auto Mortgage Loan Securitization Trust, Aug. 6, 2021
• Xin Rong 2021-2 Retail Auto Mortgage Loan Securitization, Aug. 13, 2021
• VINZ 2021-2 Retail Auto Loan Asset-Backed Securities, Aug. 17, 2021
• Generation 2021-3 Retail Auto Mortgage Loan Securitization, Sept. 7, 2021

Rating Actions In 1Q-3Q 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

• China Property Watch: Strains In The Key Of 'B', Oct. 27, 2021
• A Primer On China's Auto Loan Asset-Backed Securities, Oct. 21, 2021
• China's Auto Recovery Is Hitting A Speed Bump, Oct. 19, 2021
• China RMBS Shielded From Evergrande Events, Oct. 7, 2021
• Credit Conditions Asia-Pacific Q4 2021: COVID Besets, China Resets, Sept. 28, 2021
• Economic Outlook Asia-Pacific Q4 2021: Growth Slows On COVID-19 And Rising China Uncertainty, Sept. 27, 2021
• COVID, China Risks Won't Pass For Years, Say Panelists, Sept. 8, 2021
• Research Update: China Ratings Affirmed At 'A+/A-1'; Outlook Stable, June 25, 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