What NAFMII's asset-backed MTNs mean for securitisation in China

But a partner at a Chinese law firm said because NAFMII is a self-regulated organisation for the interbank market, its approval process may be easier than CSRC's. This may prove attractive to non-financial enterprises.

The partner added that NAFMII's approval process is basically a quasi-filing system. Though there is a review committee from non-financial enterprises, people expect they will do the same non-substantive review as for other types of commercial paper.

A key issue unaddressed by the draft rule is how to isolate the assets secured from the originator. The partner commented that this instrument was put on hold two years ago because practitioners could not agree on a solution. “It's a very difficult question under PRC law. For most originators, securitisation is future flow, or money that will be acquired. Issues include evidencing the transfer of receivables to a SPV and securing the transfer of future flow to the SPV to protect the interests of investors,” said the partner.

A 'wait and see' approach has been adopted in response to these concerns, and the problem will be left to lawyers and underwriters to untangle. It is impossible to address the problem under the current release, the partner added, because there are many types of asset classes for ABNs that cannot be generalised into one release.

Market infrastructure needed

Sources noted that China needed to develop the institutions for sophisticated bond markets. Zhang said that there have been lobbying discussions and preparatory work, but underwriters are still considering their possible involvement in having a leading role. The market is also looking for a package that will be appealing to international, domestic institutional or individual investors.

Zhang noted that China's security firms and banks do not have much experience on this front, and there is homework for them in terms of project structuring, distribution capabilities and back office functions.

Market infrastructure is another concern. “Underwriters, law firms, rating agencies and account firms need to work together to recommend good products that are not only at an international standard, but also cater to the local investment environment,” added Zhang.

Ong pointed out some caveats, such as the lack of a secondary market. “It remains unclear as to whether a secondary market can develop quickly,” he said. “We're not sure what it will look like: if you buy notes, can you trade them easily and will they be as liquid as you'd like?”

A step towards RMB internationalisation

The ABN's immediate impact is that it provides a much-needed alternative to traditional bank lending, which is the primary method of financing in China. “From the regulators' and banks' perspective, they would like to encourage less reliance on bank lending to manage their own balance sheets and support the macro-environment,” said Zhang.

But securitisation has been a sensitive topic in the Chinese economy. China launched a securitisation programme in 2005, but pulled back following the US subprime mortgage crisis in 2008. CSRC is again looking to securitisation as a way to reduce risk and respond to SME and private sector financing needs.

NAFMII's ABN launch pressures other regulators to look at securitisation instruments. Zhang noted that insurance company regulator CIRC is asking others to provide recommendations for insurance companies to participate actively in the securitisation market.

Though Ong is unsure about how ABNs will fare in this economic environment, he said that the developments are in line with China's long-term plans for renminbi liberalisation and nationalisation. “If the RMB is to become a freely tradable currency, there need to be safeguards to avoid a crisis such as the 1997 Asian financial crisi,” Ong said. “As part of that policy, the Chinese government is very keen to develop the debt capital markets and see securitisation as a key element.”

By Ashley Lee

This article first appeared in China Law & Practice's sister publication IFLR