China has become an economic powerhouse in Asia and throughout the world. The nation's stimulus package far outstrips the US. The socialist nation places people before banks., a photo by Pan-African News Wire File Photos on Flickr.
September 5, 2012 6:24 pm
China lifts bar on securitisation sales
By Simon Rabinovitch in Beijing
China Development Bank will sell $1.6bn in asset-backed securities this week, the country’s biggest securitisation deal, and its first in three years.
China had barred the sale of asset-backed securities in 2009 when the global financial crisis sullied their reputation.
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But after a boom in lending over the past few years, Chinese banks need to free up balance sheet space, and parcelling loans to investors via securitisation is likely to be an important part of this process.
Chinese regulators remain cautious, placing sharp limits on how banks can operate. They will be able to convert no more than Rmb50bn ($7.9bn) of assets into securities this year, less than 0.1 per cent of outstanding loans in the banking system.
The resumption of securitisation, however small, is seen by analysts as an answer to many bottlenecks in China’s financial system.
“There is a demand for securitisation from banks because they are struggling to expand their assets at the moment and they have to improve their asset structure,” said Zhou Wenyuan, head of fixed-income research at Guotai Junan Securities.
Chinese bank loans have doubled since the end of 2008, forcing lenders to repeatedly tap capital markets for equity. The credit boom also stretched loan-to-deposit ratios, which are not permitted to exceed 75 per cent. By selling loans to investors, banks get more breathing space on both fronts.
China Development Bank, a giant state-run lender that funded many of the country’s major infrastructure projects, begins the process on Friday, selling Rmb10.2bn in asset-backed securities.
In a prospectus, CDB said it was selling six tranches of notes. Four are rated AAA, one AA and the last is subordinated, with no rating. The weighted average of 49 loans comprising the securities is AA.
About half of the loans were to industries such as electricity generation and railways. Only one was classified as related to the troubled property sector.
China first experimented with asset-backed securities in 2005, but sales were limited in size and regulators said many of the repackaged loans were simply bought by other banks, keeping credit risk squarely within the banking system.
This time, officials have vowed that the securities will be targeted to a wider, non-bank audience. The China Securities Journal, a state-run paper, said the nation’s social security fund was a potential buyer.
Nevertheless, there were still worrying signs of circularity in the CDB deal. One of the two main underwriters was China Development Bank Securities, a domestic investment bank wholly owned by CDB itself.
May Yan, a banking analyst with Barclays, has warned that if China overdoes securitisation, it would become hard to assess leverage in the banking sector. However, for the time being, the real problem may be just the opposite – that the market remains too small.
Additional reporting by Emma Dong
September 5, 2012 7:04 pm
The renminbi won’t replace the dollar any time soon
By David Pilling
The latest stop on the renminbi’s whistle-stop tour to international stardom is Taiwan. From now on, Taiwanese banks will be able to clear transactions in the “redback”, making Taipei another offshore renminbi centre alongside Hong Kong. With Singapore and London jostling to be next and China now firmly established as the world’s second-largest economy, surely it can only be a matter of time before much of the world’s trade is settled in renminbi and central banks are holding a substantial part of their reserves in the Chinese currency?
Not so fast. The “internationalisation of the renminbi” – and never was something so vital for sophisticated dinner-party chatter so hard to pronounce – is as much hype as reality. A look at history is useful. By the time the dollar supplanted sterling as the go-to international currency around 1925, the US had been the world’s biggest economy for more than 40 years. Even then, it took the first world war and massive disruption of European trade to cement its place. True, China’s industrialisation is happening at warp-speed. It is possible that the internationalisation of its currency will move at a similar pace. But there are reasons to doubt that the renminbi is yet ready to join the dollar, or even the euro, as a global currency.
On the surface, progress looks impressive. Since things got started in 2009, offshore renminbi deposits in Hong Kong have leapt from almost nothing to 9.5 per cent of total banking deposits. Trade settlement in renminbi has gone from 2 per cent of Chinese trade in 2010 to 9 per cent in 2011. The issuance of “dim sum bonds”, renminbi-denominated paper issued in Hong Kong, has gathered pace. Caterpillar, McDonald’s and Tesco, plus several banks, including HSBC, are among those to have issued dim sum bonds. At the national level, China has entered into renminbi liquidity swap arrangements with more than a dozen countries from Argentina to New Zealand.
But progress is deceptive. A recent paper* by Yu Yongding, an influential economist at the Chinese Academy of Social Sciences, concludes, “all is not well with yuan internationalisation”. For a start, he says, growth in offshore renminbi use has stalled. Hong Kong deposits held in renminbi actually dropped slightly from Rmb580bn in October 2011 to Rmb554bn in March 2012. Until recently, gambling on renminbi appreciation was a one-way bet. Chinese growth and US pressure on Beijing saw to that. But from last December, the renminbi has moved less predictably against the dollar. This year, it has actually depreciated by about 1 per cent, compared with a 30 per cent appreciation from 2005. Weaker economic prospects in China mean that holding renminbi just for appreciation gains may no longer make sense.
Second, the use of the renminbi as a settlement currency has also slowed. Mr Yu argues that even its use to date is “superficial”, little more than a ruse enabling exchange rate arbitrage between the free offshore renminbi market and the controlled onshore one. If the bulk of renminbi trade is cover for arbitrage, what, asks Mr Yu, is the point?
Arthur Kroeber of Dragonomics, a Beijing-based research boutique, is another sceptic. Today, Dragonomics says, roughly 6 per cent of China’s exports and 13 per cent of imports are invoiced in renminbi. That sounds a lot. Yet by 1990, the same figures for the D-Mark in Germany were 80 per cent and 50 per cent. Even in Japan, which was trying to discourage yen internationalisation because it wanted to control its capital account, they were 38 per cent and 15 per cent. For both, that proved the high point. Today Japan accounts for just 3 per cent of global reserves. The euro makes up 28 per cent of reserves, but Germany had to join a currency union to get there.
The parallels with Japan are instructive. Like Japan, China’s growth model has been built on cheap credit at home and an undervalued currency. Japan only dared to start dismantling capital controls in the early 1980s by which time it had more or less caught up with western living standards. The Communist party is even more dependent on its ability to allocate credit and to protect state-owned industry and job-creating exporters.
That might suggest Beijing has put the cart before the horse. First, it needs to deepen domestic capital markets and free up interest rates so that they respond to market signals rather than telephone calls from state planners. Without such change, opening the capital account would be dangerous. And without that, progress on meaningful internationalisation will be slow.
That begs the question, why launch the process in the first place? One possibility is that Chinese market reformers are hoping that the logic of internationalisation will force change at home. That would make it a form of gaiatsu, the use that Japanese officials have sometimes made of outside pressure to push domestic policy. If that’s the case, it’s possible that internationalisation will proceed apace, with dramatic consequences for China’s domestic capital markets and exchange rate regime. More likely, though, is that Beijing will keep a firm hold and the process will run out of steam.
*Asian Development Bank Institute, Revisiting the Internationalization
of the Yuan, July 2012