The View | Is the next subprime crisis brewing in China’s property market?
- The slowdown in China’s asset-backed securities is raising fears of a repeat of 2008, when the complex, opaque products triggered a domino effect
- China’s potential trouble could start with the liquidity problems of its beleaguered real estate developers
China’s outlook is complicated by the rise of financial instruments that help investors manage risks in good times but accelerate downturns in bear markets, as the global financial crisis showed 15 years ago. A recent court decision in Shanghai on a case of asset-backed security fraud warns of potential dangers.
Asset-backed securities pool similar financial obligations – such as loans, credit card receivables or aircraft leases – into tradeable bond-like securities. Property, vehicles or other assets back the obligations. Loan repayments generate revenue. By blending low- and high-risk obligations, an asset-backed security can be rated investment grade to attract institutional investors. The packaging, though, may hide problems.
Though still in their infancy, asset-backed securities proved popular in China, with issuance peaking at US$494.7 billion (3.1 trillion yuan) in 2021 before retreating to US$292.4 billion last year, according to a Tsinghua University analysis.
Second in size to America’s, China’s asset-backed securities remain a largely domestic market, with both the collateral and bonds denominated in yuan. Most of the products trade on the China Interbank Bond Market, where investors are primarily local financial institutions. But the large cross holdings by banks have forged troubling interdependencies, which could trigger a domino effect when trouble erupts.
