Micro loan securitizations, which allow some of China’s biggest technology companies to securitize their loans to consumers, now make up about 8.7% of China’s Rmb2.31tr ($333bn) ABS market, according to data from Wind. But foreign investors have largely avoided the asset class so far, sticking to “safe but boring” parts of the market such as auto loan and mortgage deals.
“Foreign investors are only thinking about pursuing safe products with low but stable margins and ignoring the ‘new economy’ industries,” said a senior ABS banker at Citic Securities.
The reluctance of foreign investors to jump into micro loan ABS is partly down to worries about regulations. Chinese regulators moved against micro-lending firms on November 21 last year, when the central bank issued stricter guidelines through a document named “immediate suspension of the establishment of new online micro-lending platforms” and the National Association of Financial Market Institutional Investors (Nafmii), a regulator, temporarily suspended new issuance.
That led to a big drop in volumes. The micro loan ABS market grew by an eye-popping 319% in 2017, hitting Rmb281bn of issuance, according to data from Wind. But only Rmb148bn had been sold by November 21, 2018, making it inevitable that year-on-year volumes will be well down for the full year.
Some domestic bankers reject the argument that changing regulations are putting investors off.
“To be honest, I think some of their worries on Chinese regulations are pure excuses for not wanting to spend more time getting to know those high-growth industries, where they can find real alpha,” according to the Citic Securities ABS banker.
Micro lenders are better at disclosing information, compared with traditional banks, a second ABS banker at Citic Securities told GlobalRMB, a sister publication of GlobalCapital. Despite the two knockdowns from the regulators — the first time in 2015 when Ezubo, a P2P online financing platform, was found engaging in illegal fundraising, and the second time last November — the micro loans industry will still blossom in the long run, he said.
“Investors, onshore or offshore, tend to trust state-owned enterprises (SOEs) more, thinking that they won’t default,” added the first banker. “That’s true but, in my experience, private companies have higher overdue recovery rates than SOEs because they actually care about their investors.”
Not so fast
Perhaps it should come as little surprise that foreign investors have not jumped into the micro loan ABS market. Investors using the Bond Connect scheme to access China’s interbank bond market have also been cautious with conventional deals, largely sticking to short-dated notes or bonds from policy banks. But there are specific reasons that micro loan ABS, in particular, is off limits, said a Shanghai-based ABS specialist at a foreign bank.
“First, there’s the problem of ratings,” the banker said. “These micro loan ABS are usually not internationally rated. Unlike Chinese investors, who have multiple channels to understand the underlying assets of these deals, foreign investors will have to rely on ratings.”
Second, he added, micro loan providers are of uneven quality and it will take a while for foreign investors to distinguish which ones are less risky. Although household names such as Ant Financial and JD.com have originated deals, other originators will be entirely unknown to foreign investors.
Last, there is the problem of actually accessing the market where these micro loan ABS are traded. Almost all of the micro loan ABS deals sold so far count as corporate ABS and are listed on the exchange market, which is much harder to access for foreign investors.
The interbank market, which can be accessed more easily through Bond Connect, is home to auto loan ABS, credit card ABS, and asset backed notes (ABN). But so far, the only successfully issued micro loan ABN was a three tranche Rmb950m deal by Beijing-based JD Finance in August this year.
The underlying assets of JD’s deal are micro loans offered by the company’s internet credit product, Baitiao. The deal also obtained an A+ rating from Fitch. The two senior tranches were priced at 4.8% and 4.9% respectively and are trading at 4.85 % and 4.96%, respectively, as of 5pm Hong Kong time on November 20, according to Wind data.
This does not mean there is no way for foreign investors to access micro loan ABS. A regulator at Nafmii told GlobalRMB that with qualified foreign institutional investor (QFII) and renminbi QFII quotas, foreign investors already have some means to access the Chinese exchange market.
But after the major growth of the market since 2016, those quotas may no longer be enough.