Challenging market conditions in 2022 dragged issuance volumes of dominant market segments such as auto loan ABS and RMBS. Following China's swift shift in COVID-19-related policies, structured finance issuance volume should mildly recover, with about 4% growth this year. That said, uncertainty persists around the fundamentals of the respective sectors.

S&P Global Ratings believes economic activities and borrowers affected by the pandemic may still need time to recover in next two to three months. Therefore delinquencies in the first quarter of 2023 may remain elevated. Nevertheless, we expect our ratings on the auto ABS, RMBS, credit card ABS that we rate to remain stable as the economy gradually recovers.

Chart 1

Yield Trend

Liquidity tighter at year-end, driving up auto loan ABS coupons

• People's Bank of China (PBOC) announced a 25 basis-point (bps) reduction to the required reserve ratio (RRR) for financial institutions in late November 2022. This released about Chinese renminbi (RMB) 500 billion of long-term liquidity into the market in early December. The reduction followed a 25bps cut in April 2022. Aside from these adjustments, China has also trimmed the loan prime rate twice in 2022.
• Despite the cut to the RRR, increased financing needs due to the economy reopening and seasonal factors have driven up interest rates since mid-September 2022. The six-month Shanghai Interbank Offered rate (SHIBOR) surged by more than 70bps from a two-year low to 2.5% in the fourth quarter.
• Coupons on the most senior tranches of auto loan ABS also reflected an upward trend, rebounding to 2%-3% after bottoming out during September to early November.

Chart 2

Regulatory Update

Chinese regulator proposes to update rules on auto-finance companies

• The China Banking and Insurance Regulatory Commission (CBIRC) is soliciting public opinions on the "Rules on Auto Finance Companies (for Consultation)" (hereinafter referred to as the "Rules"), an updated draft regulation.
• The proposed revisions put forward tighter requirements on risk management, shareholder investment and corporate governance. Besides, after-sales products such as value-added products are also included in the business scope of auto finance companies (AFCs), to accommodate market needs. The proposed Rules also allow AFCs to provide leaseback services, if they have a track record of authentic trading in automobiles.
• Because the revision is still at consultancy stage, the potential impact from the update of the Rules remains to be seen.

China establishes mortgage rate adjustment mechanism for first-time homebuyers

• China established a dynamic adjustment mechanism on mortgage rates for first-time homebuyers in early January 2023. For cities where the selling prices of new homes fall month-on-month and year-on-year for three consecutive months, the floor on mortgage rates can be lowered or removed for first-time home buyers in phases.
• After the adoption of the rate adjustment mechanism, more than 20 cities have lowered mortgage rates for first-time home buyers. Most of these are tier-3 or tier-4 cities.
• Regulators have announced a series of measures to reduce property purchase restrictions for first-time homebuyers. In May 2022, China reduced the lower limit on first-home loan interest rates at the national level to 20bps below the corresponding tenor of the loan prime rate. In September 2022, regulators further granted certain cities leeway to lower or scrap the limit.

New Issuance Trends

Issuance to slowly recover in 2023 after a precipitous decline

• New securitization issuance decreased 36% to RMB 2.01 trillion (US$291 billion) in 2022, which marked the country's first annual drop in issuance since 2012.
• Fourth-quarter issuance fell 39% year on year, following declines of 30%-40% year on year for each of the first three quarters.
• The slump in annual issuance was largely due to the absence of RMBS issuance over the past 10 months, and the decline in certain corporate risk-related asset classes such as supply-chain ABS and account receivables ABS.
• We project issuance volume in China's structured finance sectors will increase about 4% to RMB 2.1 trillion this year. This in part reflects our forecast of economic growth recovering to about 5% in 2023.

Chart 3

Positive momentum in consumer loan ABS and lease receivables ABS

• Auto loan ABS ended 2022 with a marked decline in issuance of 17%, mainly due to slow origination amid weak economic conditions.
• RMBS issuance has remained stalled since February 2022. The year saw just three issuances totaling RMB24.5 billion, representing a 95% reduction from RMB499 billion in 2021.
• Leasing receivables ABS issuance increased 12% year on year to RMB311.6 billion in 2022. A broadening market for financial leasing and incentive to diversify funding sources partly supported the increase. Recent frequent issuers include auto lease and equipment lease companies.
• The consumer loan ABS sector also saw positive momentum. Despite a slow start in the first half of 2022, issuance of consumer loan ABS under the credit ABS scheme achieved staggering growth of 50% and 132% in the third quarter and fourth quarter, respectively.
• We expect the robust issuance momentum to continue in 2023, given our projections for 5.8% growth in consumption, and investors' seeking opportunities in the absence of RMBS issuance. New originators are also tapping the ABS market to raise funds. Among 18 transactions closed in 2022, four were debut ABS issuances sponsored by licensed consumer finance companies or a regional bank.

Chart 4

Chart 5

Auto ABS Issuance

Weak auto loan originations weighed on auto ABS issuance

• Auto ABS issuance decreased by 17% in 2022 to RMB218 billion after a 36% surge to RMB264 billion in 2021. The number of issuances dropped to 45 in 2022 from 52 in 2021. The decline in issuance was mainly due to lower auto loan originations in 2022. Several frequent issuers reduced the number of ABS issued in 2022 due to lower funding needs.
• Captive AFCs issued a total of RMB45 billion across 10 transactions in the fourth quarter, down 46% year on year.
• We note increasing interest by AFCs in issuing green auto ABS. 2022 saw eight green auto loan ABS issuances for a total of RMB24 billion. This accounted for about 18% of the total number of auto ABS issuance.
• While the green auto ABS market has just taken off since 2021, the number of participants is relatively limited. We anticipate more first-time originators in green issuances over the coming year or two.
• As China's auto market is accelerating its electrification progress, the portion of electric vehicle (EV) loans has reached 20%-30% in the monthly originations for some originators. Growth in such loans is likely to continue throughout 2023. Because it takes time to deliver EVs and originate EV loans, the sector is likely to grow only mildly in 2023, though the pace may accelerate in the following year.

Chart 6

RMBS Issuance

Little visibility on issuance to persist in 2023

• RMBS issuance declined by 95% to RMB24.5 billion in 2022, from RMB499 billion in 2021. There has been no RMBS issuance since February 2022.
• We think this may be largely on account of China's property market downturn and sluggish mortgage origination. Banks have been struggling to reach their mortgage origination targets. Some of them did not need to issue RMBS in 2022. Regulatory guidance on banks' loan growth and RMBS issuance also swayed the issuance trend, and we expect this to continue in 2023.
• Since November 2022, China's regulators have loosened liquidity controls and rolled out support measures for property firms. The policy U-turn may help revive growth in the housing sector. However, we don't expect a sharp rebound in real estate activity as it will take time to restore homebuyers' confidence. An 'L-shaped' recovery is more likely to occur in the second half of 2023. (See "China's Widening Property-Sector Support Takes Aim At Balance Sheets," published Jan. 17, 2023).
• Resumption of RMBS issuance depends on multiple factors, including developments in the property market, trajectory of banks' mortgage origination, and regulatory stance on mortgage growth and RMBS issuance.
• We believe a meaningful recovery of RMBS issuance will not occur until 2024, though intermittent issuances are likely in 2023.

Chart 7

Auto Loan ABS Performance

Arrear ratios elevated as expected due to COVID impact

• In terms of all auto loan ABS outstanding, voluntary social distancing and surging infections in the fourth quarter led to a rise in arrears across all delinquency buckets.
• The M4+ ratio, showing loans more than 90 days in arrears, further increased in December to 0.21%, a 25-month high, from 0.15% in September.
• The weighted-average M2 ratio (31-60 days in arrears) climbed to 0.15% in December from 0.11% in September. The M3 ratio (61-90 days past due) for all outstanding auto loan ABS transactions also shifted 2bps upward to 0.08% in the fourth quarter from 0.06% in the third quarter.
• For the auto ABS transactions that we rate, there exists some divergence in delinquencies because we include transactions with distinct pool attributes. These attributes include vehicles backing the loans that are not from car makers associated with originators. Higher credit enhancement mitigates the increased credit risk.
• Similar to the general trend, the severe delinquency ratios of the auto loan ABS transactions that we rate increased by 7bps to 0.23% in the fourth quarter.
• That said, the weighted-average M2 and M3 ratios for transactions that we rate remained relatively low at 0.11% and 0.05%, respectively, in December.
• We forecast that the credit quality supporting the auto ABS transactions that we rate will remain solid in 2023, based on the economic recovery in China as COVID headwinds abate. Nonetheless, delinquency rates may trend upward slightly before leveling off. This is mainly because voluntary social distancing may limit economic activities and impede in-person collection of delinquent loans.

Chart 8

Cumulative default rates stayed low

• Cumulative default rates in 2022 were largely stable, and overall stayed below 0.5% for 2016 and later vintages.
• The rate increased 5 bps for the 2021 vintage during the fourth quarter, while 2020 or earlier vintages recorded no or minimal change. Comparing default performance across annual vintages, the 2021 vintage followed a similar pattern as 2020, and collateral performance for both vintages outperformed other earlier vintages.
• Although it takes time for delinquency rates to stabilize, favorable pool attributes, such as low loan-to-value ratios and higher seasoning relative to the initial loan tenor, will likely underpin the steady performance of auto loan ABS in terms of cumulative default rate at an absolute level.

Chart 9

RMBS Performance

Volatility in delinquency rates of RMBS we rate may increase in the first quarter of 2023

• For RMBS transactions that we rate, the early delinquency ratios remained low in absolute terms, but diverged in the fourth quarter of 2022.The M1 ratio (1-30 days past due) inched up to 0.33% in December from 0.30% in September. The M2 ratio trended upwards to 0.13% in December from 0.09% in September and 0.07% in August. The M3 ratios hovered at 0.05%-0.07%. Intermittent lockdowns and tough economic condition in 2022 may be the main reasons for the increase in delinquency ratios.
• The M4+ ratio (90-plus days in arrears) increased 15bps to 0.95% in the fourth quarter of 2022. We expect the trend to last because the factors behind the rise are likely to persist. 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 delinquency rates could remain elevated in the first quarter of 2023 with COVID cases surging, before gradually improving as the impact of the pandemic diminishes.
• In order to better gauge and track the change in credit enhancement in percentage terms as transactions amortize, we have adopted an asset coverage ratio to monitor RMBS that we rate (see chart 11). The ratio measures the number of times current collateral (excluding assets in severe delinquency) could cover outstanding balance of rated notes.
• Since RMBS transactions usually have the lowest credit enhancement level as a percentage at closing, inclusion of a new transaction will cause the ratio to dip at the month of addition.
• In general, as transactions continue to repay rated notes, the asset coverage ratios tend to trend upward over time. This indicates a steady build-up in credit enhancement and therefore more cushion to withstand potential deterioration of the underlying pools.

Chart 10

Chart 11

Cumulative default rates for most annual vintages stayed stable

• The increase in the cumulative default rate of most of the vintages was minimal, at 2 bps-5 bps during 2022, despite a 7bps increase 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 movements, regulatory stance, and the ripple effect of new COVID-19 wave over the next three to six months.
• In 2022, cumulative default rates jumped for a few RMBS transactions originated in 2020, partly due to the default of larger mortgages and the effects of COVID-19. We don't rate these transactions. It is unclear if their asset quality will stabilize amid uncertain market conditions.

Chart 12

Prepayment rates could diverge from property market trends more frequently

• The constant prepayment rate (CPR) for bank-issued RMBS transactions has fluctuated at 8%-13% during 2022. The prepayment rate ended lower at around 8.4% in December, likely in part driven by seasonality at year-end.
• Most of the time, CPR moved broadly in tandem with the second-hand property sales index, based upon our observation.
• This said, considering sliding mortgage rate conditions (see "Yield Trend" and "Regulatory Update" section) and mortgage borrowers' tendency of deleveraging due to lack of good investment opportunities, we expect to see CPR diverge more frequently in the next quarter or two.

Chart 13

Credit Card And Consumer Loan ABS Performance

Rising arrears for consumer loan ABS due to COVID-related disruptions

• Zhaoyin Hezhi 2021 Phase I Personal Consumer Loan Asset-backed Securities, a credit card ABS that we rate, has entered its amortization period. The performance of the transaction in terms of key credit and cash flow metrics is within our initial rating expectation. The rated notes will be paid down in the next few months, in our assessment.
• Due to increased interest in consumer-related asset classes, we have made observations based upon public yet limited transaction performance data from consumer loan ABS issued under the credit asset scheme.
• The collateral performance of the selected consumer loan ABS continued to deteriorate in the fourth quarter of 2022. This could be partly due to disrupted economic activity amid surging infections.
• 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 20bps-70bps during the fourth 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 in this asset sector.

Chart 14

New Issuances In 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 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

• Economic Research: China's Earlier Policy Shift Advances Its Recovery, Jan. 18, 2023
• China's Widening Property-Sector Support Takes Aim At Balance Sheets, Jan. 17, 2023
• China Structured Finance Outlook 2023: Issuance Likely To Slowly Stir, Jan. 12, 2023
• Global Structured Finance 2023 Outlook, Jan. 11, 2023
• Credit FAQ: China Property Is On The Cusp Of A Recovery, Jan. 11, 2023
• China Retail Outlook 2023: More Bricks, Fewer Clicks, Jan. 8, 2023
• 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
• Credit FAQ: What's Behind Our First Rating On Credit Card ABS In China, Nov. 30, 2021