Key Takeaways
- We expect issuance in China's structured finance market to expand by a tepid 4% in 2023, as the economy gradually recovers after COVID restrictions are loosened.
- Issuance prospect will depend on the fundamentals of the respective sectors as the COVID impact fades.
- Collateral performances will continue to hold up across auto ABS, RMBS, and credit card ABS that we rate.
- Important sector trends to watch are the resumption timing of RMBS issuance, the issuance trajectory of consumer ABS and green auto ABS, to name a few.
China's structured finance market will likely turn around slowly in 2023. S&P Global Ratings expects issuance to grow by 4%, after a 36% decline in 2022. Momentum will remain constrained in the dominant market segments of residential mortgage-backed securities (RMBS) and auto-loan asset-backed securities (ABS). This mostly reflects uncertainty stemming from the pace of China's economic recovery and fundamentals of the respective sectors, such as developments in the property sector and vehicle sales as the COVID impact fades.
Other trends worth observing include potential new issuances from consumer finance companies. Also, issuances of green auto ABS may rise due to the increasing number of electric vehicles sold in China.
Chart 1
A Slow Turnaround Of Issuance In 2023
We expect China's structured finance issuance volume to increase about 4% to Chinese renminbi (RMB) 2.1 trillion (US$310 billion) this year from RMB2.0 trillion in 2022 (see chart 2). This in part reflects our forecast of recovering economic growth of about 5% for the country in 2023. RMBS volumes will remain quiet or experience intermittent issuances, subject to developments in the property market, banks' mortgage loan origination trajectory, and regulatory stance. We expect flat-to-modest growth in auto ABS, supported by our projected light vehicle sales growth of up to 2% for China in 2023.
Chart 2
Auto ABS
Issuance
Auto ABS issuance will likely stay flat or grow modestly in 2023, given a projected growth in light vehicle sales of up to 2% in the same year (see "China Auto: The Speedometer Is Slowing," published on Oct. 19, 2022). Auto ABS' contribution to auto finance companies' total funding will remain largely stable, with most of the contribution ranging 20%-40%, which supports our issuance growth prospect.
The risk to our above issuance forecast is in part from the rapid recent shift in China's stance on combatting COVID and its potential impact on auto sales and, consequently, auto loan origination. We expect China's auto demand to remain weak in the first quarter of 2023. Periodic shutdown of dealerships, reduced customer visits, and fragile consumer sentiment could weigh on the sales for this big-ticket item in the next few months.
Auto ABS issuance decreased by 17% in 2022 to RMB218 billion after a 36% surge to RMB264 billion in 2021. This is mainly because auto loan originations slowed in 2022. On average, each auto finance company sponsored 2.5 ABS issuances with an average size of RMB4.8 billion, a decrease from 2.6 deals with average deal size of RMB5.1 billion in 2021.
Similar to 2021, auto finance companies faced increased competition from banks in loan origination in 2022. The competitive pressure varies from one finance company to another, largely depending on an automaker's subsidy strategy and its relationship with the finance companies. We expect such competition to continue in 2023 because banks consider auto loans to be a sector with relatively stable credit quality where they can either maintain or expand their presence.
That said, we don't expect banks to be constantly active in issuing auto ABS because banks have much broader funding sources than auto finance companies. Hence, bank-sponsored issuance is a wild card to our issuance forecast. In 2022, only one auto ABS was bank sponsored, out of 45 deals issued, lower than four out of 52 in 2021.
Collateral performance outlook
We expect the credit quality supporting the auto ABS we rate to remain solid in 2023, based on the economic recovery in China after the near-term COVID headwind. Nonetheless, delinquency rates may trend upward slightly before levelling off. This is mainly because voluntary social distancing may limit economic activities and impede in-person collection of delinquent loans. The weighted average 30-plus-day delinquency ratio of our rated auto ABS transactions has been about 0.30% since August 2022. It is likely to inch up but remain low over the course of 2023.
In our view, the volatility of delinquency rates for our rated transactions may remain elevated until a month or two after COVID waves subside.
Ratings outlook
We expect our ratings outlook on Chinese auto 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
We expect RMBS issuances this year to remain quiet or show intermittent activity. Factors that can affect issuances include developments in the property market, trajectory of banks' mortgage origination, and regulatory stance on mortgage growth and RMBS issuance (see "Other Top Trends To Watch" below).
RMBS issuance declined by 95% to RMB24.5 billion in 2022, from RMB499 billion in 2021. Bank of China Ltd., Industrial and Commercial Bank of China Ltd., and Postal Savings Bank of China Co. Ltd. each sponsored one transaction. There has been no RMBS issuance since February 2022. We think this could be attributed largely to China's property market downturn and sluggish mortgage origination. Banks have been struggling to reach their mortgage origination targets. Some of them need not issue RMBS in 2022. Regulatory guidance on banks' loan growth and RMBS issuance could also sway the issuances trend.
Collateral performance
We expect some volatility in delinquency rates on the RMBS we rate. Delinquency may increase in the first quarter of 2023 with COVID cases surging, before gradually improving as the pandemic impact diminishes. The ratio of loans 61-90 days past due was 0.03%-0.06% during 2022, similar to the 0.04% average in 2021. The 90-plus-day delinquency rate of our rated RMBS was about 0.67% on average in 2022, hovering between 0.52% and 0.85% throughout the year.
In the RMBS sector, cumulative default rate of most of the loan vintages stayed below 0.85%. Default rates for most vintages increased 2 basis points (bps) to 5 bps during the third quarter of 2022, except a 7-bp rise for the 2020 vintages. The deterioration in some transactions can be attributed to the defaults of larger mortgages and the effect of COVID. The future collateral performance will be driven by factors such as property price movement, regulatory stance on the property sectors and the development of COVID after restrictions have been lifted.
Rating outlook
We expect our ratings outlook on Chinese RMBS to remain stable for some 30 'AAA' rated tranches and stable to positive for only one other investment-grade ('AA+') rated classes. This is based on our expectation for stable collateral performance, and increased credit enhancement because the rated notes amortize over time.
Credit Card ABS
Two credit-card ABS were issued in 2022, compared with three in 2021 and two in 2020. We believe the issuance in this segment will depend on market conditions in 2023, based on issuers' judgement of their funding costs.
We rated our first China credit-card ABS, a Zhaoyin Hezhi series transaction, in December 2021. We expect our rating outlook on Chinese credit card ABS to remain stable for two reasons. First, we expect collateral performance, as measured by various delinquency rates, to remain stable. Second, we forecast an unemployment rate in China of 5.3% in 2023, which compares favorably with our projection of 5.6% for 2022.
Other Top Trends To Watch
Meaningful recovery of RMBS issuance may come in early 2024; uncertainty remains high
Resumption of RMBS issuance depends on multiple factors, namely property market development, the growth of mortgage origination, and regulatory stance on mortgage growth and RMBS issuance. In our view, meaningful recovery of issuance will not occur until 2024, but intermittent issuances are likely in 2023.
Although the rapid loosening of COVID-related restrictions gave hopes that the worst of lockdown conditions is behind China, the surge in infections will spell downside risks to our forecast of 5%-8% decline in home sales in 2023 and may push the expected "L" shaped recovery further into 2024 (see "China's COVID Wave: Q1 2023 Will Be Critical," published Dec. 21, 2022).
Due to the weak property market in 2022, many market participants believe most banks were behind in their home loans origination targets. That means there is a diminished need to issue RMBS to manage mortgage books. Based upon our expected "L" shaped recovery extending further into 2024, we expect a meaningful recovery of RMBS issuance in the first half of 2024 at the earliest, purely based upon sector fundamentals. Nevertheless, we believe intermittent RMBS issuances are still likely if the regulatory stance is supportive.
Robust issuance of consumer-loan ABS likely to persist into 2023
Because of data availability, we focus on consumer-loan ABS issued under the credit ABS scheme and sponsored by banks and consumer finance companies under China Banking and Insurance Regulatory Commission's purview.
Issuance of consumer ABS in 2022 amounted to RMB30 billion, which came from 18 deals sponsored by 11 originators. This is about 24% growth, compared with the issuance amount of RMB24 billion from 13 deals sponsored by eight originators in 2021.
We expect the robust issuance momentum to continue because of improving economic growth prospects, potentially more originators issuing ABS, and investors' search for opportunities in the absence of RMBS issuance.
The rapid adjustments and lifting of COVID restrictions should eventually mean stronger growth in 2023. Overall, the recent developments have given us more confidence on our forecast of a recovery in 2023 to about 5% GDP growth, from approximately 3% in 2022. Domestic consumption should be buoyed by the exit from the "dynamic zero-COVID" policy.
China has about 20 consumer finance companies eligible to issue ABS. Also, more such finance companies and banks repeatedly issued ABS. The increasing number of originators bode well for future steady issuance, which helps to attract more investors to this growing sector. The low RMBS issuance has also spurred investors to broaden their investment appetite to other consumer sectors such as consumer loan and auto lease.
Investors are typically cautious about the unsecured nature of the underlying consumer loans, which are more susceptible to macroeconomic conditions than secured consumer loans such as home and auto loans. This can be illustrated by a more rapid and significant deterioration of collateral performance of selected consumer ABS transactions (see "China Securitization Performance Watch 3Q 2022: Sectors' Performance Diverging On Lockdowns, Market Volatility," published on Nov. 11, 2022). Nevertheless, consumer ABS typically have more excess spread available to absorb potential credit losses. Also, credit enhancement required to support the same rating tends to be higher than that of RMBS and auto ABS, based on our observations.
Green auto ABS will continue to gain prominence among originators
In 2022, eight green auto ABS sponsored by five originators were issued, accounting for about 18% of the number of issuances. This is a notable development compared with three sponsored by three originators out of 52 issuances in 2021.
Besides those that have issued, we expect more first-time originators in green issuances over the coming year or two. Some of the originators launched more electric vehicle (EV) models in the past 12 months or plan to do so in early 2023. EV loans have accounted for 20%-30% of monthly origination for some auto finance companies, while others expect to see meaningful growth in EV loans throughout 2023. Toward the end of 2023, they may have enough EV loans to issue a small-ticket green auto ABS. As it takes time to deliver EVs and originate EV loans, we expect only mild growth in this sub-sector in 2023, but that may accelerate in the following year.
Related Research
- China's COVID Wave: Q1 2023 Will Be Critical, Dec. 21, 2022
- China's Property Lifeline Won't Stretch To All, Dec. 5, 2022
- Global Credit Outlook 2023: No Easy Way Out, Dec. 1, 2022
- Credit Conditions Asia-Pacific Q1 2023: Still Above Water, Dec. 1, 2022
- China Auto: The Speedometer Is Slowing, Oct. 19, 2022
- A Primer On China's Consumer Loan Asset-Backed Securities Market, Sept. 2, 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
This report does not constitute a rating action.
| Primary Credit Analyst: | Patrick Chan, Hong Kong + 852 2533 3528; patrick.chan@spglobal.com |
| Secondary Contacts: | Jerry Fang, Hong Kong + 852 2533 3518; jerry.fang@spglobal.com |
| Yilin Lou, Hong Kong +852 2533 3524; yilin.lou@spglobal.com |
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