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China Structured Finance Outlook 2025: A Few Sectors Take Off Amid Overall Stagnant Issuance

China's structured finance market will likely be stagnant in 2025. S&P Global Ratings anticipates flat overall issuance, after a modest increase of about 8% during 2024. The historically dominant segments of residential mortgage-backed securities (RMBS) and auto-loan asset-backed securities (ABS) will stay constrained. A few niches, including consumer loan ABS and micro and small enterprise (MSE) loan ABS, are likely to continue driving growth in securitization issuance.

Our outlook reflects the fundamentals of the respective sectors, such as favorable policy guidance on consumption and consumer finance. It also takes into consideration recent developments in the property market and vehicle sales.

Table 1

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Issuance Regained Some Momentum Late In 2024

China's structured finance issuance volume rebounded to Chinese renminbi (RMB) 2.03 trillion (US$279 billion) in 2024 (see chart 1), an 8% increase from 2023. Issuance momentum reversed in the second half of 2024. This, in our view, indicated robust funding needs as well as the demand to securitize assets to lighten balance sheets in several sectors such as consumer loan ABS, MSE loan ABS, and quasi-REITs.

Trends vary significantly across regulatory regimes. Under China's credit asset securitization (CAS) scheme, issuance declined by 23% in 2024, mainly due to a slowdown in auto loan ABS and consumer loan ABS.

Corporates, in contrast, are actively tapping into the ABS/asset-backed notes (ABN) market for fundraising. Issuance under the National Association of Financial Market Institutional Investors (NAFMII) scheme surged by 63% to RMB524 billion in 2024. Meanwhile, issuance under the China Securities Regulatory Commission (CSRC) scheme remained stable at RMB1.24 trillion in 2024, up 3%. Some issuers have been active in both the exchange and NAFMII markets over the past year, but NAFMII issuance has gained greater prominence relative to 2023, indicating evolving regulatory dynamics.

Issuance across different asset types also exhibited a diverging pattern. Loan originations for auto and residential mortgage loans remained subdued, leading to sluggish auto ABS and muted RMBS issuance. Favorable fundamentals meanwhile have fueled burgeoning momentum in sectors such as consumer loan ABS and MSE loan ABS.

We further note that issuances of both quasi-REITs and infrastructure REITs surged by over 80% last year, reflecting the growing popularity of securitization for project funding and the need to shrink balance sheets during this period.

Chart 1

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Outlook For 2025: Overall Issuance Will Likely Be Stagnant

We expect China's structured finance issuance volume to remain flat at RMB2 trillion (US$274 billion) in 2025.This in part reflects our view on issuance trends for key asset types.

The issuance of RMBS will remain quiet, subject to the regulatory stance and the trajectory of mortgage loan origination. For auto loan ABS, we expect a modest decline in the coming year, reflecting our view on light vehicle sales and auto loan penetration rates in China for 2025.

Robust issuance momentum in consumer loan ABS and MSE loan ABS will help offset the decline in issuance volume from historically significant sectors. We are less certain on the outlook for quasi-REITs and infrastructure REITs. While growth in these sectors in 2024 is largely policy-driven, it remains to be seen whether the trend will continue in the coming year.

Auto ABS

Issuance

Auto ABS issuance has fallen for three consecutive years, primarily due to intensified competition from banks, which has led to sluggish origination. In 2024, total issuance volume fell approximately 28% to around RMB130 billion. On average, each auto finance company sponsored 2.3 ABS issuances, with an average size of RMB4.1 billion, down from 2.5 deals with an average size of RMB4.7 billion in 2023.

Auto ABS issuance looks set to decline further in 2025, considering the largely flat light vehicle sales of up to 2% (see "Global Auto Outlook: More Players, Less Profit," published on RatingsDirect on Oct. 9, 2024) and dropping auto loan penetration rates for auto finance companies. Bank competition in auto loan origination remains a key factor for auto ABS issuance sponsored by the auto finance companies.

Interest has stabilized for issuing green loan ABS. In 2024, nine green auto ABS were issued; they accounted for about 28% of total ABS issuances, inched up from 26% in 2023. Most of these loans were originated by key players affiliated with major electric vehicle manufacturers. BYD Auto Finance led the originator rankings, issuing three green auto loan ABS in 2024. We expect that the momentum for green auto loan ABS will remain steady in 2025 as the issuance is likely to come from the same limited number of sponsors.

Collateral performance

For the auto ABS we rate, the underlying asset quality should remain solid in 2025. Nonetheless, delinquency rates across the overall auto loan ABS sector, including both rated and unrated auto ABS, may stay elevated due to the underwhelming economic recovery and the easing of regulatory standards for auto loan underwriting. Asset performance is likely to vary among transactions, influenced by the specific loan features of collateral pools.

As of mid-2024, the weighted-average 30-plus days delinquency ratio for all outstanding auto ABS transactions had increased to over 0.6%, the highest level since early 2020. The ratio edged down to around 0.55% in late 2024. We expect the asset delinquency rate to remain volatile throughout 2025.

Ratings performance

The ratings on Chinese auto ABS that we rate should remain stable for 'AAA'-rated tranches. This is based on our forecast of stable collateral performance and increasing credit enhancement for most amortizing transactions.

RMBS

Issuance

We expect RMBS issuance to remain stalled. Last year saw zero new issuances, nor did we receive any RMBS-related inquiries. Driving factors include the persistent downturn in the property market and sluggish mortgage originations in China.

In our view, issuance will not resume until the property market shows meaningful recovery and mortgage loan origination picks up for a few quarters. While stimulus measures announced by the Chinese government in the fourth quarter of 2024 provide some support to the property market, it will take time for these policies to have a significant impact.

We believe China's property sales could stabilize in the second half of 2025 if the government continues to enhance funding conditions for developers and assists in destocking inventories.

For the existing RMBS, paydown of transactions rapidly increased over the past year, driven by continuous mortgage loan prepayment since September 2023. The number of outstanding RMBS has dropped by over 70, bringing the total to approximately 205 by the end of the third quarter of 2024.

Collateral performance

We expect the overall delinquency rates of outstanding RMBS to stay largely stable in 2025, barring any significant wave of prepayments.

The weighted-average early delinquency ratios were stable throughout 2024. For example, the weighted-average ratio of residential mortgage loans 61-90 days in arrears hovered between 9 basis points (bps) and 13 bps in the first three quarters of 2024. In contrast, the weighted average ratio of residential mortgage loans more than 90 days in arrears is around 2.7% as of September 2024, up from 2.4% at the end of 2023. This increase is primarily due to a significant reduction in the outstanding pool balance resulting from high prepayments, as well as the accumulation of troubled loans that require time to resolve.

In terms of default performance, the cumulative default rates for all loan vintages have remained below 1.1%. The cumulative default rate has moderated in 2024 versus the year before. However, the rate remained relatively high for some transactions from the 2020 vintage, partly due to the defaults on larger mortgages and the lingering effects of the pandemic.

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

In our view, the consumer finance ABS sector will expand in 2025, underpinned by China's policy initiatives, originators' increased funding needs, and growing investor interest in this asset class. In particular, the ABN registered with NAFMII and ABS issued on exchanges will likely tap a broader base of offshore investors during 2025.

Consumer finance ABS has grown significantly since 2021, notwithstanding a decline in transactions issued under the CAS scheme of about 40% to around RMB24 billion in 2024. The decline is probably due to issuers shifting to financial debentures as an alternative fundraising channel. When combining the issuance of credit ABS with financial debentures issued by licensed consumer finance companies, the aggregate volume soared 80% to RMB76.7 billion in 2024 from RMB42.5 billion in 2023. This trend indicates that the consumer finance companies are using instruments with different durations to achieve a preferred funding mix.

From the perspective of corporate ABS schemes, issuance is thriving. The aggregate issuance of consumer loan ABS and ABN has jumped by 68% compared with 2023. Notably, ABN issuance under China's NAFMII scheme saw robust growth of over RMB140 billion in the past 12 months. Active issuers include trust companies and microcredit firms such as affiliates of JD Finance and Du Xiaoman Financial. Considering our estimated retail sales growth of 4.3% for 2025 and the favorable regulatory environment, the strong issuance momentum will likely continue for consumer finance ABS.

Collateral performance

S&P Global Ratings has assigned ratings to consumer loan ABS issued under the CAS scheme and the CSRC scheme. The asset performance of rated transactions, as measured by various delinquency rates, has remained within expectations since deal closings. We expect the stable performance trend to continue, along with China's economic recovery, with a forecast unemployment rate of 5.3% in 2025.

Ratings performance

We expect our ratings on consumer loan ABS to stay stable for 'AAA'-rated tranches and other investment-grade classes ('AA+' through 'BBB-'). This is in light of steady collateral performance and structural mitigants that can help contain credit losses in the event of economic stress.

Equipment-lease ABS

Equipment-lease ABS has been one of the major asset types, with RMB300 billion issuance accounting for around 15% of all ABS issuance in 2024. The issuance amount and percentage to total issuance have remained at a similar level in the past three years.

In late 2024, we assigned an 'AAA (sf)' rating to an equipment lease ABS, the second rating since the first one we assigned in 2019. We expect to rate more such types of transactions. We also anticipate more originators in this sector will expand their offshore investor base in the coming year.

Digital design: Halie Mustow

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Yilin Lou, Hong Kong +852 2533 3524;
yilin.lou@spglobal.com
Secondary Contact:Jerry Fang, Hong Kong + 852 2533 3518;
jerry.fang@spglobal.com

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