【Brokerage Beats Banks in Chinese Securitization Race】By Maria Trombly | Securities Industry News | October 24, 2005
The securitization industry is in its infancy in China. There are plans afoot to securitize assets that would then be traded in an interbank exchange.
But a brokerage has beaten bank-based securitization plans to the punch; the first product was packaged last month and is now trading on the Shanghai Stock Exchange.
The brokerage is a top-three Chinese firm, the China International Capital Corp. (CICC). The product securitized is future technology licensing revenues of China Unicom, a telecommunications company. The issue raised RMB3.2 billion ($400 million)--quite a bit more than the RMB2 billion originally projected.
Bing Hu, head of the China Securities Regulatory Commission securitization team, estimates that China's securitization market could ultimately exceed $100 billion.
The hard part was getting regulatory approval. CICC has to qualify as an "innovative" brokerage--one of only about a dozen firms to receive this classification. The process began at the start of 2004 and approval came this year, CICC managing director Alex Zhao told Securities Industry News. "And it only took 20 days from approval to public launch," he added.
The regulator, the China Securities Regulatory Commission (CSRC), which is the country's answer to the Securities and Exchange Commission, started studying the securitization concept in 2002. Bing Hu, head of the commission's securitization team, estimates that China's securitization market could ultimately exceed $100 billion.
"The CSRC is actively encouraging brokers to conduct securitization business," Hu said. "Ten brokers out of over 100 will be approved."
Behind the encouragement is the fact that the Chinese stock market is down and brokerages are losing money in their core trading business. The government, forced into the position of bailing out troubled brokerages, owns about two-thirds of all stocks and its shares cannot be traded on the open market, though this is starting to change (SIN, May 9).
Another argument in favor of securitization is that most bonds are issued by the federal government and only a few big, monopolistic enterprises can issue them. This means that companies needing cash have to either sell equity or borrow from banks.
According to Hu, most corporations have credit ratings too low to issue bonds.
"These enterprises do possess high-quality assets," Hu noted. "Using these assets to issue asset-backed securities is more practical than bonds. And there are no size limitations."
With the Chinese suffering from a lack of good investment choices, the oversubscription of the China Unicom issue came as no surprise. "Demand is huge, and it has broad acceptance from investors," said Hu.
According to Jeff Wei, founder of CNWallStreet.com, a Shanghai-based research firm, there are now two parallel securitization tracks in China. Credit asset securitization takes place within the banking system, and noncredit assets such as China Unicom's receivables go through the securities industry.
Consisting of a true sale of assets and liquidity after the initial sale, China Unicom constitutes an actual securitization deal. Previously, the issuing party would retain partial or full ownership of the underlying asset, or there would be little or no opportunity for the buyer to resell the security later on.
According to Jia Miao, a researcher at Citic Securities Co., securitization not only allows companies to raise money at a lower cost, but also create a potentially large revenue stream for Chinese brokerages.
If the market size is taken at $25 billion, that could mean $124 million in profits for securities firms, she said.
"Commission-fee revenue from securitization business greatly lowers operational risks for brokers and will become a significant profit-earning point," said Dong Chen, an analyst at the research department of Yinhe Securities Co.
Local press reports indicate that several other "innovative" brokerages are planning securitizations, including Citic Securities, China Merchants Securities, Guangfa Securities, Guoxin Securities and Huatai Securities Co. CICC is also reportedly working on a follow-up project.
Citic Securities began work on its securitization project immediately after the success of China Unicom. "As one of the top three brokers in China, we won't fall behind," said Jihai Shan, a senior vice president in Citic's asset management division. Shan expects the preliminary work to be completed soon and said he is confident of government approval.
Wendy Yu contributed to this report.