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Asia CommentGC Asia View

China’s ABS market is ripe for more green deals

A fast growing sector in need of more greens

The booming ABS market onshore holds great green potential that must be developed

China’s ABS market is growing rapidly and becoming greener — but is it enough to support the country’s climate initiative and green transformation? Not quite.

Latest statistics by Chinese data provider Wind paint a positive picture for the onshore ABS market, which is already the second largest globally.

Over the first three quarters of 2021, new issuance of securitization deals increased 21% year-on-year, taking the total size of the market to Rmb4.77tr. In particular, in the credit ABS market — ABS originated by financial institutions — new issue volume jumped 65% compared to a year ago, while RMBS issuance soared 125%.

However, the green development of the onshore ABS market is still notably lagging.

China is home to the world’s second largest green bond market, but green ABS only made up about 10% of this market. The percentage of green ABS in the broader onshore ABS market is even less significant, at less than 2%.

It is evident that the ABS market holds enormous green potential, but more work needs to be done to really grow the market.

The signs are positive already. While the overall green contribution is still small, new green ABS issuance has been rising in recent years. There have been 129 green ABS deals sold onshore worth Rmb150bn since 2016, according to a July Fitch report.

On the policy front, China’s recently released 2021 green bond catalogue from April lays the foundation for the ABS market — as part of the broader bond market — to become greener. With the new guidance, the ABS market can contribute in areas such as green transportation, sustainable buildings and many others.

Beijing is also dedicated to developing the ‘carbon neutrality bond’ market to support its pledge to reach peak carbon dioxide emissions by 2030 and become carbon neutral by 2060.

Under the initiative, the likes of China Longyuan Power Group and Ningbo Shuntong Group Co have sold the first green ABS deals with a carbon neutrality label this year. Longyuan is a leading wind power producer under state-owned China Guodian Corp, and Ningbo Shuntong is a Zhejiang-based public transport operator. Other firms like Power Construction Corp of China and Hebei GCL New Energy Co have also printed carbon naturality ABS trades.

When it comes to credit ABS, the market has also seen the first green auto loan ABS by an auto finance company, SAIC Finance Co, and the first internationally rated green ABS from BYD Auto Finance Co.

But as the green ABS market continues to develop, its limitations have become more apparent.

For example, financial institutions including banks, an important group of ABS originators, can and should be encouraged and incentivised to contribute more to the green ABS market. So far, the vast majority of onshore green ABS deals are sold by non-financial corporations — mostly state-owned — and some financial corporations.

Chinese banks are also the biggest ABS investors onshore. The People’s Bank of China has said it will include green finance — including bonds and loans — performance in its evaluation of banks, starting July 1.

But more incentives are needed for banks to invest specifically in green ABS deals to boost demand for the asset class.

While Beijing has done plenty to develop the broader green bond market, more supportive policy and clearer regulatory frameworks and rules are needed to support the transformation of the ABS sector.

In the exchange market, the Shanghai Stock Exchange published rules in the form of a Q&A for green ABS issuance in 2018, clearly defining green ABS, while making requirements on matters such as third-party verification and information disclosure. But green ABS-dedicated guidelines are still missing in the interbank and the asset-backed notes markets, which account for about 34% and 16% of the overall ABS market, respectively.

The government needs to continue improving transparency and disclosure in its domestic bond market, and align its green standards more with international ones. Only with a steady and consistent approach will China’s green ABS market flourish.

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