The asset backed securities that sunk the U.S. economy, namely the complicated financial products known as mortgage backed securities, is a market China wants to consider opening up to...Americans.
Well, not just Americans, but any multinational investment bank with a penchant for the asset backed securities game: creating financial products, mainly loans, based on the assets of another product. One only needs a minute or two to think how relatively easy it will be in China to find loans to package up and sell to yield hungry investors. But how safe are Chinese securities based on debt based on equity that is based on debt that is based on a building that has its entire revenue stream already compromised as collateral to lenders?
If it yields a few hundred basis over Treasurys, someone will find a buyer for it. How does you say "there's a sucker born every minute" in Mandarin?
Then again, this market got itself a bad rap in 2008. Asset backed securities aren't that bad. There's just a little misunderstood. China understands them as a means to fund its companies without having to rely on government banks.
As China liberalizes its financial market, which is to say make it more Western, asset backed securities will grow to a three trillion yuan business, or roughly $480 billion in the next four years. By comparison, the U.S. asset backed securities market was around $1.2 trillion in 2012 -- which includes securitization of things like student loans and franchise businesses.
China wants to build one of the world's biggest markets for little understood, much unappreciated,... [+]
Premier Li Keqiang's cabinet is set to further liberalize the asset-backed securities (ABS) market this year, encouraging financial institutions to create products and trade them in the market. This will help Chinese companies tap new sources of funding. It spreads the credit risk to other would-be lenders. And it gives China banks and the foreign firms that will be allowed to participate a new product to create out of thin air and sell for millions in fees.
China's new cabinet announced their interest in the global ABS market last year in an effort to ease fears that state lenders were floating around in a gigantic credit bubble they've blown too large for their own good.
The ABS market could become an effective source of funding for cash-hungry companies often tapped out of the traditional market when the Central Bank hikes interest rates to keep borrowers at bay.
One of the biggest complaints about China right now is that its banks are taking on too much debt, and some of that debt, more than banks are letting on, is non-performing. However, what the market basically knows from the leading institutions monitoring this sort of thing, like the World Bank, is that China's non-performing loans are on par with world averages.
"[Asset-backed securities] could be developed into a market worth trillions of yuan," Gu Weiyong, chief investment officer of Shanghai Ucon Investment Management, told the South China Morning Post on Monday
The Communist Party leadership allowed for an ABS market of 400 billion yuan ($64.5 billion) last year and plans on upping the ante in the second half, according to the paper. They predicted products worth as much as three trillion yuan could be issued by 2018, making China one of the world's largest -- and most promising -- growth markets for these risky securities.
Asset-backed securities are created when investment firms buy and bundle loans, such as mortgage loans, commercial loans or student loans. They turn these into funds backed by the good faith and credit of the borrowers and then sell them to investors.
This market collapsed famously when the subprime mortgage crisis sunk the mortgage backed securities trade famously levered to the hilt by Bear Stearns and Lehman Brothers.
During the financial crisis, ABS investors suffered major losses. Hundreds of banks were closed, thousands of jobs were lost on Wall Street as a result of this derivative blow-out. The crisis revealed that many investors did not understand the full risk of the underlying assets, and these assets were all in plain English. Imagine understanding the assets cemented into the ground somewhere in Nanjing?
That ABS market accounts for around 1% of the
The Biggest ABS Issuers of 2013
The packaged loan market. Here are the entities providing the most fodder for the adventurous world of asset backed securitization. AIG and
Company 2013 Issuance 2012 Issuance
Volkswagen $17.3 bln $15.5 bln
Santander $15.8 bln $23.2 bln
Japan Housing $15.7 bln $23.7 bln
Ford $15.1 bln $16.2 bln
Citig $12.9 bln $1.9 bln
Ba $9.9 bln $12.8 bln
All $9.9 bln $16.2 bln
Salli $9.8 bln $13.8 bln
J.P. $9.3 bln $11.6 bln
Credit $8.6 bln $5.5 bln
AIG $8.0 bln $2.2 bln
Source: ABAlert.com. Issuance includes all asset backed securities, including mortgage backed products, collateral loan obligations and credit default obligations.
