Issuance in China's securitization market continued declining for a third consecutive quarter in 2022. Most asset classes, such as RMBS and auto-loan ABS, recorded a yearly drop in issuance volume in the third quarter. On the other hand, issuance of lease receivable and consumer loan ABS recorded relatively strong growth momentum.

S&P Global Ratings expects volatility in delinquency rates to remain elevated in the next quarter or two, considering prolonged mobility controls and their effect on the economy. Also, the credit quality of securitized pools could remain under pressure against the backdrop of challenging macroeconomic conditions.

Yield Trend

Ample liquidity drove down auto loan ABS coupons

• In August, China lowered the five-year loan prime rate by 15 basis points (bps) to 4.30% and the one-year loan prime rate by 5 bps to 3.65%.
• Along with the rate cut in benchmark lending rates, the six-month Shanghai Interbank Offered rate (SHIBOR) continued to trend downward during the third quarter of 2022. By the end of August, the six-month rate fell below 1.75% to its lowest level since June 2020.
• Coupons on the most senior tranches of auto loan ABS also followed the declining interbank rate trend. Some of them were priced below 2%--a near record low in the past six years. Repeated issuances priced in the third quarter were 24 bps-60 bps lower than their most recent transactions priced in the first half of 2022.

Chart 2

New Issuance Trends

Lower economic growth dragged down issuance in the year to date

• New securitization issuance decreased 38% year on year to Chinese renminbi (RMB) 525 billion (US$73 billion) in the third quarter of 2022. Total issuance in the first nine months of 2022 dropped 35% year on year to RMB1.48 trillion (US$207 billion).
• The slump in issuance largely stems from the absence of RMBS issuance over the past six months and the decline in supply-chain ABS and account receivables ABS.
• Annual issuance in 2022 is likely to fall beyond our initial expectation of a 10% decline from 2021--which was the country's first annual drop in issuance since 2012. This is because of lackluster economic activity and the likelihood of issuance levels remaining weak.

Chart 3

Issuance trend varied by asset class

• Auto loan ABS issuance fell 21% from a year ago to RMB47 billion in the third quarter. Some frequent originators either did not issue ABS in this period or closed their deals in October.
• There has been no RMBS issuance since February, so the year-to-date total remained at RMB24.5 billion, down 93% from RMB373 billion in the first three quarters of 2021.
• A property market downturn and sluggish economic activity continued to drag the issuance of corporate-related ABS. Account receivables-backed transactions fell 22% in the first nine months of 2022 and supply chain ABS dropped 43%.
• Leasing receivables ABS were popular, recording strong growth of 28% to RMB233 billion during the first nine months of 2022. This was partly supported by the broadening market for financial leasing and incentive to diversify funding sources. Recent frequent issuers include auto lease and equipment lease companies.
• Consumer loan ABS is another sector receiving increased attention. With the support of frequent issuers and two new issuers, issuance of consumer loan ABS under the credit ABS scheme rose 50% year on year in the third quarter. This quarter was also the most active quarter in the past nine years, with six transactions priced, totaling RMB10.5 billion.

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Chart 5

Auto ABS Issuance

Quarterly issuance dropped; more supportive measures rolled out

• Captive auto finance companies issued a total of RMB47 billion across nine transactions in the third quarter, down 21% year on year. The drop is mainly due to reduced issuances by some auto finance companies related to manufacturers of vehicles with internal combustion engines.
• Despite slowing issuance momentum in the third quarter, a recovery of light vehicle sales since August could somewhat boost auto ABS issuance in the next few quarters, in our assessment. We estimate sales will rise 4%-6% this year. This is because of a temporary cut to the purchase tax for certain internal combustion engine vehicles since June as well as an extension to a tax-exemption policy for new electric vehicle purchases.
• Auto finance companies' interest in issuing green auto ABS remains steady. Six green auto loan ABS issuances, totaling RMB18.5 billion, during the first three quarters of 2022 accounted for about 10% of total auto ABS issuance in this period. BYD Auto Finance took the top spot for such issuance with three green auto loan ABS transactions in the year to date.

Chart 6

RMBS Issuance

Issuance remained muted in the third quarter

• There has been no RMBS issuance since mid-February 2022. This meant RMBS issuance plummeted 93% year on year to RMB24.5 billion in the first three quarters of 2022.
• This partly reflects weak mortgage origination volume due to the strained property sector and sliding homebuyer confidence.
• Consequently, banks weren't as pressed to manage their funding and mortgage loan books via RMBS issuance.
• A similar issuance pause occurred around mid-2021, though it lasted only three months.
• Recent mortgage strikes have further complicated the situation, and the sector is contending with waning homebuyer confidence. We estimate national property sales will tumble by a third in 2022, with home prices set to fall 6%-7%.
• It's unclear when RMBS issuance will resume, but it's likely to depend on mortgage origination momentum and the regulatory stance in next few quarters.

Chart 7

Auto Loan ABS Performance

Severe delinquency ratio exhibited greater volatility than before, as we expected

• In terms of all auto loan ABS outstanding, COVID-19-related lockdowns in several regions in the third quarter led to greater volatility in the severe delinquency ratio and a slight rise in early delinquency ratios.
• The M4+ ratio, showing loans more than 90 days in arrears, was 0.15% in September, almost double the 0.08% recorded in January. The ratio exhibited volatility, ranging between 0.11% and 0.16% in the second and third quarters, compared with 0.09%-0.11% in the second half of 2021.
• The weighted-average M2 ratio (31-60 days in arrears) climbed to 0.11% in September, while the weighted-average M3 ratio (61-90 days past due) for all outstanding auto loan ABS transactions stayed relatively stable at 0.05%-0.06%.
• We expect COVID-19-induced mobility restrictions to continue to weigh on the credit quality of the pools backing outstanding auto loan ABS. The curbs will hamper borrowers' income stability as well as the feasibility of in-person collection.
• We've seen some divergence in delinquencies for the auto transactions we rate because we include transactions with distinct pool attributes. These attributes include vehicles backing the loans that are not from car makers associated with originators. The increased credit risk has been mitigated by higher credit enhancement.
• We expect the severe delinquency ratios of the auto loan ABS we rate to remain elevated for a few months before leveling off.
• That said, the rated transactions' weighted-average M2 and M3 ratios remained low at 0.09% and 0.05%, respectively, in September.

Chart 8

Cumulative default rates stayed low

• Cumulative default rates were largely similar to those in the first half of 2022, and overall stayed below 0.5% for 2016 and later vintages.
• The rates increased 3 bps for the 2020 vintage and 6 bps for 2021 during the third quarter. Compared with early vintages such as 2015 or earlier, the collateral performance of transactions originated in 2020 and 2021 remained favorable.
• Although economic growth has been sluggish, we expect 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 in terms of cumulative default rate at an absolute level.

Chart 9

RMBS Performance

Mortgage strikes could hamper RMBS backed by forward delivery houses

• We believe the mortgage boycott will have knock-on effects for RMBS and corporate risk-related ABS, on top of the already weakened property market in China (see "China Property Sales Set To Drop By A Third As Mortgage Strikes Break Out," published July 26, 2022).
• The RMBS transactions we rate are not exposed to risks from property developers strained due to the strikes because the underlying pools are backed by existing home mortgage loans, and therefore face no construction risk.
• China's central bank plans to launch a RMB200 billion fund to aid completion of stalled property projects. It signals the central government's intention to revive confidence in the property sector. We expect further support measures may be rolled out to turn the property sector around (see "Only China's Government Can Revive Property Confidence," published Sept. 14, 2022).
• Given that it will take time to shore up the property sector, it remains to be seen how the mortgage strike plays out and whether the measures will have a meaningful effect on RMBS asset performance during the next six months.

Volatility in late delinquency rate of RMBS we rate increased as expected

• For RMBS transactions that we rate, the M4+ ratio (90-plus days in arrears) increased to 0.80% at the end of the third quarter of 2022 from 0.68% at the end of the second quarter. We expect the trend to persist because the factors behind the rise are likely to continue. The increase of the M4+ ratio was in part due to the paydown of the underlying pools and accumulated severe delinquent loans taking time to work out.
• We maintain our view that volatility in late delinquency rates could remain elevated due to the uncertainty around the effect of the dynamic zero-COVID-19 policy.
• Early delinquency ratios remain largely stable. The M1 ratio (1-30 days past due) stayed low, at around 0.30% for the third quarter. The M2 and M3 ratios remained at or below 0.1%.

Chart 10

Cumulative default rates rose marginally; trajectory depends on certain critical factors

• The increase in the cumulative default rate of most of the vintages was minimal, at 2 bps-5 bps during the third quarter of 2022, despite a 7 bps rise for the 2020 vintages.
• The cumulative default rate of most of the vintages stayed below 0.85%.
• Critical factors that will drive asset performance of RMBS include property price movement, regulatory stance, and the trajectory of the pandemic, particularly the scale and duration of lockdowns, in our assessment.
• A few RMBS transactions originated in 2020 have shown a jump in cumulative default rates in the past three quarters, partly due to the default of larger mortgages and the effect of COVID-19. We don't rate these transactions. It is unclear if the asset quality will stabilize amid uncertain market conditions.

Chart 11

Prepayment rate could sit around 6%-14% in the next two quarters

• The constant prepayment rate (CPR) for bank-issued RMBS transactions has fluctuated, hovering around 9%-13% during the third quarter of 2022.
• The secondhand property sales index has diverged from the trend of CPR since early this year. This seems to indicate mortgage borrowers' tendency of deleveraging, likely driven in part by low investment income amid sliding interest rate conditions.
• Unpredictable homebuyers' sentiment and recent events will continue to weigh on property sales volumes, and thus CPR could fluctuate between 6% and 14% in the next six months.

Chart 12

Credit Card And Consumer Loan ABS Performance

Consumer loan ABS arrears are rising

• Zhaoyin Hezhi 2021 Phase I Personal Consumer Loan Asset-backed Securities, a credit card ABS we rate, has demonstrated stable performance in its first 10 months since closing.
• The M2 ratio is 0.48% and M3 is 0.42% as of Sept. 30, 2022. Both ratios have remained largely flat over the past six months.
• Prime credit card ABS generally has a higher loss rate on the initial portfolio balance than prime auto loan ABS. This mainly reflects the unsecured nature of credit cards and their relatively weaker arrears performance.
• The collateral performance of selected consumer loan ABS, however, appears to be deteriorating rapidly and significantly. For some consumer loan ABS issued by top-tier consumer finance companies and banks under the credit ABS scheme (see chart 14), the M3 ratios increased 0.4%-1.8% approximately during the second and third quarters of 2022, compared with about 2 bps of movement in auto loan ABS during the same period. We do not rate these transactions and have no knowledge about the expectation of the performance trend and the structural mitigants. However, the performance we observed during the period is a good indication of the level of volatility of this asset sector.

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Chart 14

New Issuances In First Three Quarters Of 2022

• Silver Arrow China 2022-2 Retail Auto Loan Asset Backed Notes Trust, Sept. 14, 2022
• Ruize 2022 Phase II Retail Auto Mortgage Loan Securitization, Sept. 1, 2022
• Autopia China 2022-2 Retail Auto Mortgage Loan Securitization Trust, Aug. 26, 2022
• Bavarian Sky China 2022-2, June 16, 2022
• Fuyuan 2022-2 Retail Auto Mortgage Loan Securitization Trust, June 14, 2022
• Autopia China 2022-1 Retail Auto Mortgage Loan Securitization Trust, April 19, 2022
• Silver Arrow China 2022-1 Retail Auto Loan Asset Backed Notes Trust, March 15, 2022
• Bavarian Sky China 2022-1, Jan. 21, 2022

Rating Actions In First Three Quarters Of 2022

• Xin Rong 2021-2 Class A2 Notes Upgraded To 'AAA (sf)'; Rating On Class A1 Notes Affirmed At 'AAA (sf)', Oct. 17, 2022
• Driver China ten Class A Notes Upgraded To 'AAA (sf)', Feb. 22, 2022
• Driver China eleven Trust Class A Notes Upgraded To 'AAA (sf)', Feb. 17, 2022

Related Research

• China Auto: The Speedometer Is Slowing, Oct. 19, 2022
• Sector Roundup Asia-Pacific Q4 2022: More Pain Points As Growth Slows, Sept. 28, 2022
• Credit Conditions Asia-Pacific Q4 2022: Brakes On Growth, Pain Down The Road, Sept. 27, 2022
• Economic Research: Economic Outlook Asia-Pacific Q4 2022: Dealing With Higher Rates, Sept. 25, 2022
• China's Zero-COVID Stance Poses A Bigger Threat To Firms Than Inflation, Sept. 20, 2022
• Only China's Government Can Revive Property Confidence, Sept. 15, 2022
• A Primer On China's Consumer Loan Asset-Backed Securities Market, Sept. 2, 2022
• Credit FAQ: Real Estate Funds, A First Aid To China's Property Slump, Aug. 18, 2022
• China Property Sales Set To Drop By A Third As Mortgage Strikes Break Out, July 26, 2022
• China Structured Finance Midyear Outlook 2022: New Issuance Set For Historic Fall, June 19, 2022
• A Primer On China's Residential Mortgage Backed Securities Market, May 24, 2022
• A Primer On China's Auto Loan Asset-Backed Securities Market, April 28, 2022
• Credit FAQ: What's Behind Our First Rating On Credit Card ABS In China, Nov. 30, 2021