Abstract

A breakthrough reform is undergoing in the Chinese capital market: a proposal to modify the current security law is under the review of the National People’s Congress, which attempts to the current offering system from approval system to the registration system. If such proposal is approved by the National People’s Congress, then China’s security regime will enter a new post- registration time. In the post-registration time, the securities regulators would not focus on keeping the gate and the offering and play the role as the allocator of financial resources. Instead, they need to focus on the investors’ protection, which should be the center of the regulation of Chinese capital market. The core issue of the investors’ protection would be the information asymmetry problem, which haunts the relationship of the issuers and the investors. The asset-backed security (ABS) business is an emerging business in China. The information asymmetry problem is significant in ABS market due to the complexity and the opacity of securitization. This article will take ABS as an example to explore the information asymmetry problem in the Chinese ABS market and seek solutions. The first part of this article provides a snapshot of the ABS market in China. The second part discusses the functions, benefits and concerns of ABS via the lens of the Lemon Market Theory. Then, the article comments on the Chinese Securities Regulatory Commission (CSRC)’s rules of disclosure regarding the underline assets, which are apparently hailed as pioneering but unfortunately still a platitude. Part Four analyzes the dilemma of signaling and screening and explores possible alternative solutions by allocating risks to originators. The final part summarizes the article.


I. A Snapshot of ABS Market In China

Securitization is a pool of homogeneous financial cash flow by producing illiquid assets and issuing claims on those assets in the form of marketable securities. The securitization began in China at the end of 2004 when the Chinese Securities Regulatory Commission (CSRC) issued the rules of the pilot for the securitization. The blueprint of regulators is to test the risks of securitization business in some pilots under the close supervision by regulators. If the risks of securitization are acceptable for market and regulatory regime to afford, then the regulators would expand the entry for more participants to get into the market. However, the experiment of securitization was suspended in 2008 in China due to the panic of the global financial crisis. The securitization was restarted in 2012. The market of ABS rapidly grew in 2014. Beginning from the end of 2014, the offering system of ABS was changed from the approval system to the registration system: the Chinese Banking Regulatory Commission (CBRC) issued a notice that the ABS of credit assets needed to be registered with the CBRC and CBRC would not review the quality of the underline assets any more. The People’s Bank of China (PBOC) and CSRC also issued a similar rule to replace the approval system with the registration system. In post-registration time, the ABS market is expected to expand fast and the next decade may the golden decade for ABS in China. As the estimation by Moody’s, the total assets of the ABS market will reach around 500 billion in 2015.

In China, there are two types of asset securitization businesses, which are operated by different companies and subject to different regulatory regimes. One is the securities companies’ asset-backed securitization business, using special purpose vehicle (SPV) and subject to the supervision of CSRC. The companies’ asset-backed securitization products are mainly traded on the fixed income platform of Shanghai Stock Exchange and the comprehensive protocol platform of Shenzhen Stock Exchange. Another is (banks’) credit asset securitization business supervised by the CBRC and the PBOC. This kind of products is mainly traded on the asset-backed commercial paper platform, the purchasers in which are institutional investors. The trust companies are in the center of securitization of credit assets as trustee institutions.

The securitization is an invention and innovation in financial world. The securitization make the greatest utility of the assets，which are lack of liquidity but capable of generating predictable and stable cash flows. The underlying assets for the securitization business include the existing assets and the future assets. The existing assets means that the amount of assets are fixed by the existing contracts, such as receivables by the BOT projects of infrastructure construction, by the acquisitions of assets or mortgage loans. Such kind of assets exists in the form of debt-credit relationship. In contrary, the securitization of future assets involve the title or right to a particular property, such as the rights to claim highway tolls and the right to claim the proceeds generated by the disposal of urban construction sewage. This kind of securitization is a form of “securitization of rights of remuneration”. In China, the eligible assets of for the credit are limited the credit (existing assets) generated by the financial institutions (like the mortgages or the car loans), while the corporate asset securitization allows a wide scope of existing or future assets held by the companies.

For those like securitization, it is an innovation in contracting to provide the low cost of financing. For those dislike securitization, it is a sedan directly connected to the subprime financial crisis in 2008. The next section will discuss the functions, the benefits and the concerns of the securitization so as to see whether it is a good boy, a bad boy or a combination of good and bad.