China's structured finance market will make a subtle shift in 2022. Momentum will stay cautious in the dominant market segments of housing and auto loans. Meanwhile, S&P Global Ratings expects a slight broadening of the market, if issuers manage to woo international investors to some consumer-backed products.

While issuance should continue to grow, momentum will slow compared with last year's 8% expansion and the compounded annual growth rate of 25% from 2014 to 2020. This is in part due to the strained property sector and slower property sales, which may have ripple effects on related issuance in corporate-risk related asset-backed securities (ABS) and residential mortgage backed securities (RMBS).

For 2022, the focus, especially of offshore market participants, remains on auto loan ABS and RMBS. Other developments bear watching, however. This includes the potential offshore participation in consumer loan ABS, and the fallout of strained property developers on corporate risk-related ABS.

Chart 1

Deceleration Of Issuance Growth Likely To Persist In 2022

We expect Chinese structured finance issuance volume to increase about 3% to Chinese renminbi (RMB) 3.2 trillion (US$500 billion) this year from RMB3.1 trillion in 2021 (see chart 2). By our estimates, corporate risk-related sectors, including supply-chain ABS and deals backed by account receivables and leasing receivables will expand in the mid-single digits; this in part reflects our forecast of China's slowing economic growth at 4.9% in 2022. RMBS volumes will likely dip moderately, largely due to a 10% drop in residential sales (by our estimates) in 2022 and the uncertainty of regulatory shifts. We expect flat-to-modest growth in auto-loan ABS, supported by our projected 3%-5% growth in light vehicle sales for China in 2022.

Chart 2

Auto Loan ABS

Issuance

Auto-loan ABS issuance growth will likely decelerate in 2022 after last year's 36% jump to RMB264 billion in 2021, from RMB194 billion in 2020. This is mainly because some auto finance companies (AFCs) appeared to rely more on ABS to finance their loan origination in 2021. On average each AFC sponsored 2.7 ABS transactions with average size of RMB5 billion, an increase from 2.2 deals with average deal size of RMB4.6 billion in 2020.

We expect flat-to-modest growth in auto-loan ABS supported by projected 3%-5% growth in light vehicle sales for China in 2022 (see "Slides: China's Auto Recovery Is Hitting A Speed Bump," published on RatingsDirect on Oct. 19, 2021). Auto loan ABS's contribution to AFCs' total funding will remain largely stable, with most of the contribution ranging between 20% and 40%, which also supports our view of issuance growth prospects.

It's noteworthy that some banks have actively expanded their presence in auto loans and auto-loan ABS in the past year or two. In terms of auto-loan ABS issuance, bank originators, especially China Merchants Bank, contributed to issuance growth in 2021. Banks sponsored RMB21 billion of auto loan ABS issuance (8% of issuance), a notable growth from RMB10 billion (5% of issuance) in 2020. Another example related to loan origination is Ping An Bank. The bank's auto-loan origination grew 41.1% to RMB221 billion in 2020. While AFCs will face increasing competition from banks in both auto loan origination and attracting ABS investors, the issuance trajectory for auto-loan ABS might be modestly steeper than our expectations if banks make more use of ABS to finance auto-loan origination in coming years.

Additionally, we expect to see more AFCs join a "green" frenzy to issue green auto ABS, of which the underlying loans are backed by new energy vehicles to raise a company's profile. The typical deal size will likely be RMB1 billion or less, much smaller than the average auto ABS deal size that mostly ranged from RMB3 billion to RMB10 billion in 2021.

Collateral performance outlook

We expect the credit quality of the pools supporting the auto ABS we rate to remain solid in 2022, based on continued economic recovery in China. Nonetheless, delinquency rates may trend upward slightly before levelling off. This is mainly because last year we began rating more transactions with collateral pools composed of broader customer bases. The weighted average 30-plus-day delinquency ratio of our rated auto ABS transactions has been around 0.14% since September 2021. It is likely to inch up but remain low over the course of 2022.

We don't see risks coming from broad industry or macroeconomic trends, including effects from the COVID-19 pandemic. In our view, risks would more likely emerge from idiosyncratic originators and issues--such as aggressive expansion to less familiar cities or into riskier sub-segments such as used cars or add-on loans.

Ratings outlook

We expect our ratings outlook on Chinese auto-loan ABS to remain stable for 'AAA' rated tranches and stable to positive for other investment-grade ('AA+' through 'BBB-') rated classes. This is based on our expectation for stable collateral performance and increased credit enhancement for most amortizing transactions.

RMBS

Issuance

Heading into 2022, we expect RMBS volumes will likely drop moderately, on the back of a 10% fall in residential sales. Other key drivers include property price movement and whether regulators ease up or further tighten their restrictions on the sector.

RMBS issuance rebounded to RMB499 billion in 2021, similar with the pre-COVID 2019 level and up 18% from RMB424 billion in 2020. China Construction Bank Corp., the largest RMBS sponsor, contributed 15 out of the 62 new RMBS transactions in 2021, followed by Industrial and Commercial Bank of China, which closed 10 RMBS deals in 2021. Other top frequent issuers include Bank of China Ltd. (BOC), which did five transactions, and China Merchants Bank Co. Ltd. with four.

We note that top mortgage originators in China have made their RMBS available to offshore investors at a steady pace since 2018. We initiated ratings on the Jianyuan series RMBS sponsored by CCB in 2018 , followed by Zhaoyin Hejia series RMBS sponsored by CMB in 2020. In 2021, we rated Zhong Yin Wan Jia 2021-5 RMBS sponsored by BOC. We believe Asia-Pacific investors have continued to follow developments in this market. However, given the softness in China's housing market and the ongoing pandemic, offshore investment will remain cautious in 2022.

Collateral performance

We expect the RMBS we've rated to maintain stable credit metrics. The 61-90 day past due ratio was 0.03%-0.05% during 2021, similar to the 0.05% average in 2020. The 90-plus-day delinquency rate of our rated RMBS was about 0.5% on average in 2021, hovering between 0.45% and 0.6% throughout the year.

As for the RMBS sector, a small number of RMBS that we don't rate experienced a notable hike in the cumulative default rate to over 1% in 2021; this compares with 0.2%-0.3% for securitized products with similar deal seasoning. The deterioration in some of transactions can be attributed to the impact from the pandemic. The fallout from COVID-19 remains a wild card for outstanding RMBS transactions. Lockdowns of varying restrictions and duration could be imposed in different places, often on short notice. That may hurt mortgage borrowers whose loans make up the underlying pools of some RMBS transactions, and therefore weigh on asset performance.

Rating outlook

We expect our ratings outlook on Chinese RMBS to remain stable for some 30 'AAA' rated tranches, and stable to positive for the investment-grade ('AA+') rated class. This is based on our expectation for stable collateral performance, increased credit enhancement because the rated notes amortize over time.

Credit Card ABS

Three credit-card ABS were issued in 2021, compared with two in 2020 and still much lower than 11 in 2019. We believe the issuance in this segment will remain opportunistic in 2022, based on how issuers judge the funding costs.

In December 2021, we rated the first Zhaoyin Hezhi series transaction. This was also our first credit-card ABS rating from China. Our ratings outlook on the segment is stable.

Other Top Trends To Watch

Will consumer-loan ABS be the next sector available to offshore investors?

We expect improving asset performance for broadly consumer-financing ABS in 2022. This may help restore investor confidence and allow for issuers to even, potentially, reach international investors.

In 2021, broadly defined "unsecured-consumer ABS" issuance amounted to about RMB300 billion, accounting for nearly 10% of total issuance in 2021. There are three types of originators or key transaction participants that usually sponsor or initiate broadly defined unsecured consumer ABS: banks; centrally regulated consumer finance companies; and e-commerce finance companies.

In the past few years, issuers in this segment made a few attempts to tap offshore investors, but interest was not strong. We believe the lack of interest is due to tightening regulations over the past few years, and COVID-induced asset quality deterioration in 2020. In our view, however, investor concerns on asset quality is the biggest obstacle to offshore participation in consumer-finance securitization.

We think it's possible that issuers will try again to woo offshore investors. Incentives include diversifying sourcing of funding and lowering cost. This is because we estimate that in 2021 over 20% of broad consumer loan ABS had their senior most tranche still priced more than 4%, which is significantly higher than around 3% of the senior tranche of auto-loan ABS. We expect originators to continue their efforts in placing issued notes with comparable costs, given similar tenor of consumer loan ABS to auto-loan ABS although asset features slightly differ. In addition, asset performances largely stabilized during 2021 as COVID became better contained. This was despite softening consumer sentiment under a slowing property market and zero-COVID policies.

Corporate risk-related ABS

Corporate risk-related ABS here include transactions that are still fully or significantly tied to the credit risk of the corporate sponsors. Those transactions could be supply-chain ABS, account receivables-backed ABS, and even commercial mortgage-backed securities.

Chart 3

Corporate risk-related ABS has been one of the key growth segments of China securitization over the past few years. This is in part because companies such as property developers acted as sponsors for transactions such as supply chain-related deals (e.g., exchange-listed ABS and asset-backed notes) to better manage their working capital. But this broad segment was negatively affected by strained property developers. Take supply chain-related deals as an example. Issuance from this segment jumped 20% in 2020--even during COVID--but abruptly shrank by 21% in 2021 (see chart 3).

Because of our anticipated sluggish issuance from property developers, we expect issuance by corporate risk-related sectors, if it recovers from 2021, to grow in the mid-single digits. That is much lower than double-digit growth in the past few years. The slow recovery partly reflects the slowing economic growth in China. Also, a strained property sector may continue to affect issuance in related ABS, but corporates from sectors such as factoring and leasing sectors are likely to maintain or increase ABS issuance to finance their business growth in 2022.

In terms of transaction performances and disclosure of material events, the information in the public domain is opaque. Some reports suggest that property developers sought to extend payments for the ABS they sponsored and ultimately have obligations to make whole. We don't rate any of these products. However, we will be keeping an eye on how the fallout in the property sector may affect corporate risk-related sectors in securitization market.

Digital design: Evy Cheung

Related Research

• China's Consumer Sector Faces Another Tough Year, Jan. 24, 2022
• Global Structured Finance 2022 Outlook, Jan. 12, 2022
• Global Credit Outlook 2022: Aftershocks, Future Shocks, And Transitions S&P Global Ratings, China | Can Risks From Beijing's Policy Tightening Be Contained?, Dec. 1, 2021
• Credit Conditions Asia-Pacific: China Slows, A Chill Wind Blows, Dec. 01, 2021
• China Property Watch: Strains In The Key Of 'B', Oct. 27, 2021
• Slides: China's Auto Recovery Is Hitting A Speed Bump, Oct. 19, 2021
• A Primer On China's Auto Loan Asset-Backed Securities, Oct. 21, 2021
• A Primer On China's Residential Mortgage Backed Securities Market, June 24, 2020