China Grand Automotive Service, the country’s largest car rental company, successfully sold its asset-backed securities (ABS) last week, marking a key step forward in China’s financial reform. It is the first ABS backed up by car loans.
Wang Changqing, managing director of Grand Automotive, told the Shanghai Securities Journal that the 1.1 billion yuan (US$181 million) ABS is backed by accounts receivable from about 27,000 clients. About 1 billion yuan of the securities were graded senior A tranche, which has the best credit quality and lower yield.
The company said proceeds of the fundraising exercise will be used to step up the development of its passenger car rental business. It currently depends on shareholders’ capital and bank loans for business expansion.
In August, the People’s Bank of China urged businesses to securitize their good-quality assets and sell them to investors via the interbank market and exchanges.
Meanwhile, the China Banking Regulatory Commission has approved the opening of 16 car loan companies with combined assets of 170 billion yuan (US$28 billion), said Zhang Dianzhong, director of the CBRC non-banking supervision department.
This shows the car loan ABS market has much room to expand.
Buying cars through loans accounted for about 70 percent of car sales in overseas markets. But in China, the ratio is far smaller, and one of the reasons is the lack of financing channels.
If more car companies can tap the ABS market for funds, they would be in a more competitive position to offer car loans.
Asset securitization could help the economy make better use of available liquidity. But regulators have to keep a close watch on the quality of underlying assets to avoid the subprime crisis that gripped the US property market and led to the financial meltdown in 2008.
Given that China’s financial system is still relatively immature, authorities and regulators have to walk the thin line between development and risk management.
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