Fitch Ratings stated today that China stands to become the one of the most expansive securitisation markets in Asia given the size of its asset base. Due to various impediments for the pilot securitisation programs with China Construction Bank and China Development Bank, however, the securitisation of assets is likely to occur utilising off-shore structures to overseas investors.

"Asia structured finance suffers from a consistent flow type of business. Inter-regional credits are difficult to aggregate due to regulatory issues and securitisation opportunities there are therefore limited in terms of scale. China, however, is a market with a huge asset base whereby you can get scale and can easily be recognised," said Jet Zhou, Associate Director in Fitch's structured finance team in Beijing. Speaking at Fitch's Global Structured Finance Conference Asia 2005 there today, Mr. Zhou added that until now, securitisation in China has been impeded by banks' and corporates' poor record-keeping and opaque business practices. "Securitisation is information intensive and needs to quantify asset performance in very specific ways. When the legal framework and regulation problems are solved to some extent, impediments to the securitisation process within a company still remain," said Mr. Zhou.

He notes that this has hindered the central bank's efforts to relax the currently strict constraints on that product. However, Fitch believes that once a business model is established by the pilot transactions, China will see a host of securitisation deals driven by the market's huge appetite. "Deals of the simplest structure, with thicker subordinate classes or additional protections will be adopted in the near future to address the shortfalls in risk management, integrity of data and cash flow management," said Mr.Zhou, who added that a consequence could be that the costs of securitisation may be higher than expected. He further opined that asset-backed securitisations ("ABS") backed by accounts receivables, leases or other future cash flows of industrial firms pursing cash flow efficiency, might develop much faster than residential mortgage backed securitisations ("RMBS"). The latter are backed by the highest-quality loans of the commercial banks, which already tend to be cash rich.

Also speaking at the conference, James McCormack, Fitch's Head of Asia Sovereigns, provided an update of Fitch's macreconomic outlook for China. "We expect economic growth to be 9.3% this year and to decline only slightly to 8.8% in 2006 based on continued strong investment and a positive growth contribution from the trade sector," Mr. McCormack said. "Fitch believes the slowdown in import growth is not a reflection of weak domestic demand, but is instead confirmation that investment-led growth has added to China's productive capacity and international competitiveness." The agency upgraded China's sovereign ratings in October, and the Long-term foreign currency rating is 'A' with a Stable Outlook. "The upgrade was supported by the economic outlook, improvements in the banking sector and China's very strong balance of payments and net external asset position," Mr. McCormack added.

According to Fitch's projections, continued export expansion will contribute to further foreign exchange reserve accumulation in the years ahead, and China is likely to be the first country with reserves exceeding USD1 trillion. The agency also expects a steady opening of the capital account, allowing Chinese entities to invest increasing amounts abroad. "Combining the reserve accumulation with the expected outward investment flows, China's influence in the international economy and global financial markets is clearly on the rise," suggested Mr. McCormack. He also indicated that China's increased international economic profile could be accompanied by pressures for further exchange rate liberalisation. Even so, Fitch does not assume there will be significant changes in exchange rate policy in the short term, and that any future changes will be gradual.

In Asia, Fitch said the growth sector for structured finance was in collateralised debt obligations ("CDOs"). "CDOs are growing rapidly in Asia with new products introduced regularly. Keeping on top of the changes in the CDO market is a challenge for investors. Fitch has been a pioneer at rating a variety of structured credit transactions, such as collateralized loan obligations ("CLOs") and collateralised bond obligations ("CBOs") within the region. Globally, Fitch has over 110 analysts rating CDOs and writing CDO research to help investors keep up with the new innovations," said Kevin Stephenson, head of Asia-Pacific structured finance.

By People's Daily Online