Last April, China had an idea about how to boost the country’s dying credit impulse.

As we’ve been at pains to explain for more than a year, China is attempting to do the impossible. They need to deleverage and re-leverage all at the same time. Efforts to rein in the mammoth shadow banking system after years of expansion put pressure on an economy that was already decelerating and by the end of 2014, Beijing was struggling to figure out how to keep credit flowing without embedding more risk into the system.

One idea was to supercharge the country’s nascent ABS market which was barely producing $50 billion in supply per year (for context, consider that the US auto loan-backed ABS market alone saw $125 billion in issuance last year).

As Reuters noted at the time, the idea was simple: “By making it easier for banks to repackage and resell receivables – such as loan repayments on mortgages, car loans and credit cards – the government hopes to free up banks’ balance sheets so they can lend more to the real economy.”

In other words, offload the credit risk to investors who are searching for yield and once your book is unencumbered, make more loans, then package and sell them to investors, and around you go. It’s the “virtuous” originate-to-sell model and it works great – until it doesn’t.

In any event, despite comments from the likes of ANZ’s Zhao Hao who said “there is a huge demand from banks alone to securitise assets,” the plan didn’t work.

Why? Because China’s NPLs were rising at a rapid clip as the economy continued to deteriorate. Banks didn’t want to lend more and risk further imperiling their balance sheet and even if they did, demand for credit was hardly robust in an economy struggling with an acute overcapacity problem. “With the evidence mounting that the country is experiencing an economic slowdown, Chinese banks don’t want to lend, so they don’t need to sell ABS to free up more room for lending,” Ji Weijie, senior associate at Beijing-based China Securities Co. said in June. “Plus with rising bad loans, banks are reluctant to move good assets off their balance sheets.”

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