Key Takeaways
- We expect issuance in China's structured finance market to stay flat in 2024, with the issuance momentum of dominant segments to slow.
- Issuance prospects will depend on the fundamentals of the respective sectors amid a slow recovery of China's economy.
- Collateral performances will continue to hold up across auto ABS, RMBS, and consumer finance 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, as well as the increasing issuance of micro and small enterprise loan securitization, nonperforming loan ABS, and asset-backed plans managed by insurance asset management companies.
China's structured finance market will likely be stagnant during 2024. S&P Global Ratings expects overall issuance to stay flat, after declining about 7% during 2023. 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 the fundamentals of the respective sectors, such as developments in the property market and vehicle sales.
Other noteworthy trends include growing issuances of securitization backed by micro and small enterprise (MSE) loans, ABS backed by nonperforming loans (NPLs), and asset-backed plans (ABPs), which are issued and managed by insurance asset managers.
Chart 1
Slow Issuance Momentum In 2024
We expect China's structured finance issuance volume to remain flat at Chinese renminbi (RMB) 1.9 trillion (US$264 billion) during 2024 (see chart 2). This in part reflects our view on issuance trends for key asset types.
Issuance of RMBS will remain quiet, or sporadic, depending on developments in the property market. The trajectory of mortgage loan origination and regulatory stance will also have an effect. We expect flat-to-tepid growth in auto ABS, reflecting our view on the growth of light vehicle sales and auto loan penetration rate in China in 2024.
Despite the slow overall issuance, some sectors, such as consumer loan ABS and MSE loan ABS under credit ABS scheme, saw burgeoning issuance momentum in 2023 and will be worth watching in the coming year.
Chart 2
Auto ABS
Issuance
Auto ABS issuance will likely stay flat or see tepid growth in 2024, given our projected light vehicle sales growth rate of up to 2% per year during 2023-2024 (see "China Auto: Soft Demand Heightens Competition," published on Oct. 10, 2023 on RatingsDirect). Our view considers the importance of auto ABS as a key funding instrument for auto finance companies.
Auto ABS issuance has declined for two years in a row, with the total issuance volume down about 18% in 2023 to RMB180 billion. This is mainly due to slow auto loan originations during 2022 and 2023. On average, each auto finance company sponsored 2.5 ABS issuances, with an average size of RMB4.7 billion, which is comparable to 2.5 deals with average size of RMB4.8 billion in 2022.
Despite the slowing issuance of auto ABS, transactions backed by green auto loans increased their share of total issuances in the overall sector. In 2023, 10 green auto ABS sponsored by seven originators were issued, accounting for about 26% of the total number of auto ABS issuances. This is a notable increase compared with 18% in 2022 and 6% in 2021. We expect the issuance momentum of this subsector to continue over the next year due to the rapid adoption of electric vehicles in China.
Collateral performance
We expect the asset quality supporting the auto ABS we rate to remain solid in 2024, based on the economic recovery in China. Nonetheless, delinquency rates may diverge in different transactions, depending on the unique loan features of collateral pools.
The weighted-average 30-plus-day delinquency ratio of our rated auto ABS transactions rose to 0.5% amid headwinds related to the pandemic a year ago. The ratio has since declined, stabilizing around 0.3% after April 2023. We expect the asset delinquency rate to remain stable over the course of 2024 as China's economy continues to grow.
Ratings performance
The ratings on Chinese auto ABS that we rate should remain stable for 'AAA'-rated tranches, and stable to positive for other investment-grade ('AA+' through 'BBB-') rated classes. This is based on our forecast of stable collateral performance and increased credit enhancement for most amortizing transactions.
RMBS
Issuance
We expect RMBS issuances this year to remain quiet or, in a less likely scenario, to be intermittent. Factors that could affect issuances include developments in the property market, trajectory of banks' mortgage originations, and regulatory stance on mortgage growth and RMBS issuance.
There were no RMBS issuances in 2023, following a decline of more than RMB400 billion in 2022. The halt in issuance is likely because of the persistent property market downturn and sluggish mortgage originations in China. Banks have been struggling to reach their mortgage origination targets. Regulatory guidance on banks' loan growth and RMBS issuance could also sway the trend in RMBS issuance.
In our view, issuance will not resume until the property market recovers meaningfully and mortgage loan origination picks up for at least two quarters. Considering our expectation of an extended "L"-shaped recovery extending further into 2024, RMBS issuance could return in the second half of 2025, at the earliest, purely based upon sector fundamentals. Nevertheless, we believe intermittent RMBS issuances are still likely if the regulatory dynamic is more conducive.
Collateral performance
We expect delinquency rates of the RMBS that we rate to stay elevated in the coming year. Although the hit from the pandemic has diminished, China's property market remains sluggish, and relevant policy guidance, such as a mortgage rate cut, continues to affect mortgage performances.
There were notable upticks in delinquency ratios during September and October 2023 due to large prepayments that significantly reduced the underlying pool balance. The prepayment spikes were driven by regulatory guidance on mortgage rates in August 2023 and bank originators offering refinancing options to the underlying borrowers in the following months.
Due to the smaller base for the balance of total outstanding mortgage loans, the ratio of loans 61-90 days past due has increased to more than 0.1% after September 2023. This is higher than the average of 0.05% during 2022. The 90-plus-day delinquency rate of our rated RMBS also rose to around 2.5% in October 2023, compared with 0.71% on average in 2022.
In terms of static-pool performance, the cumulative default rate of all loan vintages stayed below 1%. Cumulative default rates remained relatively high in some transactions from the 2020 vintage, partly due to the defaults of larger mortgages and the effects of the pandemic. Collateral performance in the future will depend on factors such as property price movement, and government initiatives to revive the property sector, in our view.
Ratings performance
We expect our ratings on Chinese RMBS to remain stable for 'AAA'-rated tranches. Our view is based on the likelihood of stabilizing collateral performance, and increased credit enhancement as the rated notes amortize over time.
Consumer Finance ABS
Issuance
We expect consumer finance ABS to see significant growth in 2024, considering China's policy support, originators' increased funding needs, and growing investor interest in this asset class. ABS issued and traded in the exchange market, in particular, are likely to tap a broader base of offshore investors during 2024.
Issuance of consumer finance ABS has grown strongly since 2021. 24 consumer loan ABS worth about RMB41 billion were issued under the credit asset securitization (CAS) scheme in 2023. This is about 36% growth in terms of the issuance amount, compared with 18 transactions totaling RMB30.2 billion in 2022. This was partly due to policy support for consumption and consumption-related financing activities, which increased consumer loan growth and the funding needs of consumer finance companies. Issuance of other securitization regimes, such as asset-backed notes under China's National Association of Financial Market Institutional Investors (NAFMII) and exchange ABS under the China Securities Regulatory Commission (CSRC), also saw some volume from nonfinancial institution originators, given favorable regulatory dynamics.
Collateral performance
S&P Global Ratings assigned the first 'AAA (sf)' rating to consumer loan ABS from China in July 2023 and the second one in December 2023. The asset performance of the rated transactions, as measured by various delinquency rates, has remained stable since deal close. We expect the stable performance trend to continue, along with China's economic recovery, with a forecast unemployment rate of 4.9% in 2024, compared with 5.2% in 2023.
Ratings performance
We expect our ratings on consumer loan ABS to remain stable in 2024, considering steady collateral performance and structural mitigants that can help contain credit loss in the event of economic stress.
Other Top Trends To Watch
MSE loans ABS likely available to broader offshore investor base in 2024
We expect the issuance momentum of MSE loan ABS to continue in 2024, considering China's economic recovery, potentially more originators issuing ABS, and investors' seeking opportunities in the absence of RMBS issuance. Issuers are likely to tap a broader offshore investor base, given market participants' increasing familiarity with this asset class.
The first issuance of MSE loan ABS under the supervision of former China Banking and Insurance Regulatory Commission, which was replaced by the National Administration of Financial Regulation (NAFR) in May 2023, was recorded in 2017. Afterward, issuance volume soared and peaked at RMB62.5 billion in 2020. Despite some fluctuation in recent years, the issuance of this sector has been on an upward trajectory over the past three years, with total issuance reaching around RMB75 billion in 2023. This is about a 6x increase from 2018, when the "two increases and two controls" policy was announced. The increase was due to efforts by regulators and banks to step up MSE lending.
Other than the NAFR regime, issuance under NAFMII and CSRC have also drawn increasing market attention in recent years. Entities ineligible to issue ABS under the CAS scheme mostly opted for these other routes. Underlying portfolios have varying characteristics depending on individual originators' operation; however, deal structures are quite standardized across issuances, with the sequential-pay structure commonly adopted.
Banks to issue NPL ABS to manage loan books
We expect issuance in this sector to continue in 2024 as banks manage NPLs on their balance sheets. Major securitized assets will likely be nonperforming retail loans, such as mortgage loans and credit card receivables, which collectively constituted the majority of NPLs in banks' retail loans.
There have been increasing NPL ABS issuances in recent years. Some 118 transactions totaling around RMB48 billion were issued under the CAS scheme in 2023. This marked over 50% growth in issuance amount from a year earlier, when there were 68 transactions with total issuance of around RMB31 billion. Bank originators' initiatives to offload NPLs from their loan books mainly drove the increase.
Increasing asset-backed plans from insurance asset managers
We believe the growing issuance trend of ABPs will continue in 2024, given increasing attention to this emerging securitization scheme from originators and investors. For originators, ABPs allow a variety of underlying assets, and provide an alternative issuing regime with a more favorable regulatory backdrop. For investors, ABPs reportedly provide better yield than ABS issued under other regulatory regimes. This should help underpin rising issuance of ABPs in 2024, in our view.
ABPs issued and managed by insurance asset management companies have grown significantly since 2021, following NAFR's (former CIRC, China Insurance Regulatory Commission) guidelines on first-time ABP approval and subsequent issuance registration on Zhongbao Insurance Asset Registration and Exchange (Zhongbao Exchange). There were nearly 70 ABPs, totaling more than RMB300 billion, during 2023, almost double the volume in 2021.
Underlying assets in ABPs can be debt, receivables, or other rights and interests that generate income flows. Major investors are insurance companies that have more risk tolerance in investing "nonstandard" asset-backed securities. The investor base could broaden (to more noninsurance financial institutions) in 2024, with some insurance asset managers now preparing pilot issuances on bourses after receiving approvals from Shanghai Stock Exchange and Shenzhen Stock Exchange in October 2023.
Related Research
- Global Credit Outlook 2024: New Risks, New Playbook, Dec. 4, 2023
- Credit Conditions Asia-Pacific Q1 2024: India, Southeast Asia Advance As China Slows, Dec. 4, 2023
- China Retail: Tighter Belts, Broader Defenses, Oct. 17, 2023
- China Property Watch: A Slow, Sequential Recovery In 2024, Oct. 16, 2023
- China Auto: Soft Demand Heightens Competition, Oct. 10, 2023
- Credit FAQ: What's Behind The First 'AAA (sf)' Rating Assigned To Chinese Consumer Finance ABS?, Aug. 24, 2023
- A Primer On China's Consumer Loan ABS Market, June 9, 2023
- A Primer On China's MSE Loan ABS Market, May 10, 2023
- A Primer On China's Equipment Lease ABS Market, March 2, 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
This report does not constitute a rating action.
| Primary Credit Analyst: | Andrea Lin, Hong Kong + 852 2532 8072; andrea.lin@spglobal.com |
| Secondary Contacts: | Patrick Chan, Hong Kong + 852 2533 3528; patrick.chan@spglobal.com |
| Yilin Lou, Hong Kong +852 2533 3524; yilin.lou@spglobal.com | |
| Jerry Fang, Hong Kong + 852 2533 3518; jerry.fang@spglobal.com |
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