New data indicates that the vast majority of consumer loan asset backed securities (ABS) on China’s interbank and exchange market are issued by unlicensed financial institutions.
Data from Wind Information indicates that consumer loan ABS account for approximately 40% of all corporate ABS issued on exchanges since the start of the year, and comprise the largest category.
Approximately 90% of these consumer loan ABS on the interbank and exchange markets were issued by financial institutions that do not hold licenses for such activity, with Ant Financial product lines accounting for over half of the total.
Large-scale financial institutions such as JD Finance and Baidu Finance have also reportedly issued large volumes of ABS products on the over-the-counter market without holding the appropriate licenses.
China’s consumer finance companies have shown a strong enthusiasm for ABS products given low funding costs and the stability of financing channels, enabling them to rapidly amass capital.
Key funding sources include their own capital, bank loans, interbank placements, ABS, and financing from micro loan companies, with the annually cost of funds ranging from 3% to 10%.
Investors have also taken a shine to the ABS products provided by consumer finance companies, with returns of as high as 8% for base products, and subordinated yields of as high as 15%.
Additionally banks only need make provisions of 20% for investment in ABS products, enabling them to significantly economise on capital usage.
Many domestic analysts have warned Chinese investors to tread cautiously when dealing with ABS, however, given their relatively short time not he Chinese market, as well as inadequate historical data and information disclosures.