China's securitization market remained lackluster in the first six months of 2023. Amid shaky consumer confidence and continued weakness in the property sector, RMBS issuance stayed stalled and issuance slowed for auto loan ABS and corporate risk-related asset classes. Despite persisting growth momentum in some sectors such as leasing receivable ABS, uncertainties around sector fundamentals are likely to hinder a rapid issuance recovery. We expect annual issuance volume to decline by 8% during 2023.

S&P Global Ratings believes there are some early signs of stabilization in delinquency trends in the first half of 2023, even though volatility in early-stage delinquency ratios in RMBS has been slightly wider in the second quarter of 2023 compared with the past 12 months. Nevertheless, we believe the ratings on the auto ABS and RMBS transactions that we rate will remain stable as China's economy continues to recover.

It is worth mentioning that in July S&P Global Ratings assigned a 'AAA (sf)' rating to the first consumer loan ABS transaction from China. We'll expand our observations on consumer loan ABS sector based upon not only publicly available information but also our rated transaction.

Chart 1

Yield Trend

Loosening monetary stance and stable liquidity level continued

People's Bank of China announced a 10 basis point (bps) reduction to the one-year and five-year loan prime rates (LPR) in June 2023, lowering the two rates to 3.55% and 4.2%, respectively. This reduction followed an earlier cut to the required reserve ratio for financial institutions in March 2023.

The six-month Shanghai Interbank Offered rate (SHIBOR) has been trending down since the end of first quarter of 2023. As of June 30, 2023, this was 2.24%, compared with 2.54% at the end of the first quarter. The rate decrease reflects sufficient liquidity in the market.

Coupons on the most senior tranches of auto loan ABS trended down to 2.2%-2.7% during the second quarter of 2023 from 2.45%-3% in the first quarter of 2023. The overall lower level of interest rates in the market largely accounted for the change.

Chart 2

Regulatory Update

Chinese regulator published revised rules on auto-finance companies

The National Administration of Financial Regulation (NAFR) published updated Rules on Auto Finance Companies (hereinafter referred to as the "Rules") in July 2023.

The 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 Rules also allow AFCs to provide leaseback services if they have a track record of authentic trading in automobiles.

The revised Rules will take effect Aug. 11, 2023. Preliminary feedback from some AFCs indicated no material impact on their current loan origination and underwriting practices.

Policy stimulus to boost private sector and domestic consumption

China's top economic regulator, along with several ministries and departments, rolled out a series of policy documents in July and August to drive China's private sector. The measures unveiled including cutting red tape to facilitate enterprises' participation in major national science and technology projects and encouraging eligible private-owned micro, small and medium enterprises to raise funds through the bond market.

Besides, in late July, the State Council unveiled a total of 20 measures to restore and expand domestic consumption. The stimulus measures cover a wide range of industries, including automobile, real estate, home appliances, and the services sector.

The announced policy steps include easing restrictions on car purchases, supporting people buying their first homes as well as the demand for upgraded housing, boosting consumption of home improvement, and encouraging cultural tourism during the holidays. Government officials mentioned in a related press release that more concrete measures may be rolled out in the near future.

New Issuance Trends

Weak issuance volumes persist

New securitization issuance decreased by 12% year on year in the first two quarters of 2023 to RMB852.7 billion (US$126.6 billion). There were notable decreases in issuance of auto ABS and certain corporate risk-related asset classes such as supply-chain ABS. Besides, the softened property market continued to weigh on issuance of mortgage-backed securities. RMBS issuance remained stalled and commercial mortgage-backed securities (CMBS) recorded a double digit drop in issuance volume.

We expect the total issuance volume for 2023 to decrease by 8% to RMB1.85 trillion, based on our economic outlook, issuance seasonality, and the actual issuance amount during the first half of 2023.

Chart 3

Positive momentum in leasing receivable ABS

In terms of issuance venue, issuance under the National Association of Financial Market Institutional Investors (NAFMII) scheme dropped 47%, while the issuance under the China Securities Regulatory Commission (CSRC) scheme surged 10% year on year during the first half of 2023. Credit ABS managed by NAFR and the People's Bank of China (PBOC) also recorded a decline of around 15%. We have seen more active ABS issuance from leasing and factoring companies in the exchange market for fund raising.

Auto loan ABS issuance saw a 30% yearly decline in the first six months of 2023, possibly because of volatile auto sales and slow loan origination.

There was no RMBS issuance in the first half, remaining stalled since February 2022.

Leasing receivables ABS made up about 17% of total issuance volume and is one of the few sectors that registered growth in the first half, increasing by 3.1% to RMB145 billion. Equipment leasing companies are among the most frequent issuers. This is partly driven by a growing market for financial lease ABS and an incentive for these issuers to diversify their funding sources.

We have seen robust growth of some specific sectors under the credit ABS scheme, which includes consumer loan ABS and micro and small enterprise (MSE) loan ABS.

Consumer loan ABS issuance under the credit ABS scheme maintained strong momentum from the second half of 2022. Issuance in this sector grew by 150.4% year on year in the first half of 2023, supported by both repeated issuance as well as debut transactions. We forecast robust issuance momentum will continue in 2023, considering the policy support in consumption and consumption-related financing activities, regular issuance from repeated issuers, and investors' seeking opportunities in the absence of RMBS issuance.

Issuance in MSE loan ABS under the credit ABS scheme increased over 90% in the first half of 2023. Total issuance amounted to RMB20.6 billion, which accounted for around 13% of the total securitization issuance under the credit ABS scheme in the first half.

Chart 4

Chart 5

Auto ABS Issuance

Volatile auto sales and loan originations weighed on auto ABS issuance

Auto ABS issuance volume decreased by 30% year on year in the first two quarters of 2023 to RMB88.5 billion. Captive AFCs issued 17 transactions in the first half, down from 26 transactions a year earlier. Volatile auto sales and slow loan originations in the period likely contributed to the decrease. Auto sales in the first two quarters have been volatile; however, the future roll-out of concrete stimulus measures to boost car sales may increase loan originations.

Robust momentum in green auto ABS issuance continued in 2023, with five transactions totaling RMB20.6 billion settled in the first half of 2023. Green issuance accounted for 29% of total number of transactions in the first half. Issuers' enthusiasm towards this sector is likely due to rising electric vehicle (EV) loans on the back of more EV deliveries over the next year or two.

In the first half of 2023, two originators issued their debut green auto ABS, increasing the number of green issuers to eight. We anticipate more first-time originators will come to the market because the number of participants at present is relatively limited. During 2022, five originators issued green auto ABS among roughly 20 repeated sponsors.

Chart 6

RMBS Issuance

Limited visibility on issuance resumption

RMBS issuance has remained stalled since February 2022. Issuance momentum will depend on the pace of a recovery in China's property market, Chinese banks' mortgage origination volumes, and the regulatory stance on mortgage growth and RMBS issuance.

We expect an "L-shaped" recovery in China's property market, with sales to stabilize in the second half of 2023, but not taking off with any great vigor. (See "China Property Watch: Peripheral Pain", published May 22, 2023).

While property sales in China have improved in recent months, the recovery has been uneven and is more tilted to higher-tier cities and properties with better quality. By our estimates, sales in tier-one or tier-two cities will grow modestly by about 3%, while sales in lower-tier cities will drop about 10% during 2023.

Chart 7

Auto Loan ABS Performance

Stable performance across delinquency buckets

In terms of all auto loan ABS outstanding, the weighted average M2 ratio (31-60 days in arrears) saw a slight uptick to 0.12% in June 2023 from 0.11% in March 2023. The weighted average M3 ratio (61-90 days past due) saw a slight increase to 0.08% in June 2023 from 0.07% in March 2023. M4+ ratio, showing loans more than 90 days in arrears, remained at 0.26% as of June 2023, which is the same as that in March 2023. Although the arrears ratios are still relatively higher than pre-pandemic era, the overall level of delinquency rates is relatively stable when compared to March 2023, reflecting an improvement from late 2022.

Some market participants observed an increase in prepayments in the first half of 2023. This could be the result of the overall low interest rates in China, incentivizing borrowers to repay existing loans with relatively high interest rates.

For the auto ABS transactions that we rate, we saw some divergence in delinquencies because we include transactions with distinct pool attributes. These attributes include vehicles backing the loans that are not from carmakers associated with originators. Higher credit enhancement mitigates the increased credit risk.

We observed a diverging delinquency trend in the auto loan ABS transactions that we rate. M2 and M3 ratios were 0.08% and 0.05% in June 2023, compared with 0.09% and 0.05% in March 2023. The M4 ratios also decreased to 0.2% in June 2023 from 0.26% in March 2023.

We expect the credit quality supporting the auto ABS transactions that we rate to remain solid in 2023 as China's economic recovery continues.

Chart 8

Cumulative default rates remained low

Cumulative default rates as of June 2023 remained largely stable, and overall stayed below 0.5% for 2016 and later vintages.

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. The rate increased by 4 bps for the 2021 vintage in the second quarter of 2023, while 2020 or earlier vintages recorded no or minimal change.

Performance of auto loan ABS that we rate will likely remain stable because of favorable pool attributes, such as low loan-to-value ratios and higher seasoning relative to the initial loan tenor.

Chart 9

RMBS Performance

Delinquency ratios remain elevated

For RMBS transactions that we rate, the early delinquency ratios saw deterioration in the second quarter of 2023.

• The M1 ratio (1-30 days past due) increased to 0.37% in June 2023 from 0.29% in March 2023.
• The M2 ratio increased slightly to 0.12% in the second quarter of 2023 from 0.10% in the first quarter of 2023.
• The M3 ratios remained at 0.06%.

While M1 ratio increased, the overall trend remained broadly stable across M2 and M3 ratios. The M4+ ratio (90-plus days in arrears) increased by 14bps to 1.21% in the second quarter of 2023. Factors behind the rise in the severe delinquency ratio could include the paydown of the underlying pools and along with the time needed to work out accumulated severe delinquent loans.

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 the 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 continued to trend up

Cumulative default rates of most vintages saw an increase between 2bps and 6bps in the second quarter of 2023. The cumulative default rate of most of the vintages stayed below 0.85%.

Future asset performance of RMBS will hinge on property price movements, regulatory stance, and the strength of China's economic recovery.

We noted cumulative default rates remained relatively high for some transactions from the 2020 vintage. This is partly due to the default of some large size mortgages and the effects of COVID-19. These transactions were not rated by us and it is unclear if their asset quality will stabilize.

Chart 12

Prepayment rates remained relatively high on low interest rates and expected return on investments

The constant prepayment rate (CPR) for bank-issued RMBS transactions was 13% as of June 2023 after reaching 21% in April 2023. We believe this prepayment rate level is higher than in 2022 and is partly driven by low interest rates, a lower expected return on wealth management products, and a rebound of repayment applications after the lifting of measures to control the pandemic.

In general, CPR tends to move in tandem with the second-hand property sales index. Both trends moderated in the second quarter of 2023 after a spike in the first quarter of 2023. This could be due to a brief cooling of existing borrowers' demand for new homes.

Chart 13

Consumer Loan ABS Performance

Relatively volatile consumer loan delinquency rates in time of stress

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.

It is worth mentioning in July that S&P Global Ratings has assigned a 'AAA (sf)' rating to the first consumer loan ABS transaction from China. We'll expand our observations on consumer loan ABS sector based upon not only publicly available information but also our rated transaction in upcoming publications.

In this report like before, some consumer loan ABS issued by top-tier consumer finance companies and banks are selected. All the selected transactions were settled in the era of COVID-19, during which mobility controls and social distance measures posed challenges in loan repayment, servicing and collection. Currently most of the selected transactions have been fully redeemed.

Most of the M3 ratios increased by around 20bps-60bps during the first two quarters of 2023 (see chart 14), compared with a flat movement in auto loan ABS during the same period. This could be a result of lingering effects after China relaxed its pandemic-control measures.

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 under economic stress.

Chart 14

New Issuances In The First Half Of 2023

• Generation 2023-2 Retail Auto Mortgage Loan Securitization, June 9, 2023
• Silver Arrow China 2023-1 Retail Auto Loan Asset Backed Notes Trust, March 14, 2023
• Generation 2023-1 Retail Auto Mortgage Loan Securitization, March 10, 2023
• Xin Rong 2023-1 Retail Auto Mortgage Loan Securitization, Feb. 24, 2023

Rating Actions In The First Half Of 2023

• Jianyuan 2021-8 Residential Mortgage Backed Securities Class B Notes Upgraded To 'AAA (sf)'; Class A-2 And A-3 Affirmed, June 26, 2023
• Xin Rong 2021-3 Class A2 Notes Upgraded To 'AAA (sf)', June 19, 2023
• River Funding No. 4, Ltd. Class 1 Notes Rating Affirmed At 'AA- (sf)', April 17, 2023

Related Research

• China Ratings Affirmed At 'A+/A-1'; Outlook Stable, June 28, 2023
• Economic Outlook Asia-Pacific Q3 2023: Domestic Demand, Inflation Relief Support Asia's Outlook, June 26, 2023
• A Primer On China's Consumer Loan ABS Market, June 9, 2023
• China Property Watch: Peripheral Pain, May 22, 2023
• A Primer On China's MSE Loan ABS Market, May 10, 2023
• China Auto: Navigating Demand Uncertainty, April 26, 2023
• China Consumer Products And Retail: Sales Pick Up As COVID Controls Wind Down, Jan. 13, 2023
• China Structured Finance Outlook 2023: Issuance Likely To Slowly Stir, Jan. 12, 2023
• Global Structured Finance 2023 Outlook, Jan. 11, 2023
• 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