What drives enterprise asset-backed securitization in China?

ABSTRACT

Using transaction-level data on enterprise asset-backed securities (ABS), we investigate the relationship between ABS issuance, interest savings, and firm characteristics in China. About half of the ABS deals were issued by small and medium-sized enterprises (SMEs), and around 70% of the issues carry a coupon rate lower than the average interest rate on bank loans. Firms issue more ABS when the interest savings are high, or when they face more restricted access to credit. Private firms are most responsive to the benefits provided by the enterprise ABS market compared to state-owned enterprises and foreign companies.

KEYWORDS:

• Asset securitization
• enterprise asset-backed securities
• financing cost
• financing constraint
• small and medium-sized enterprises

JEL CLASSIFICATION:

• G32
• C51

Acknowledgments

We would like to thank Professor Ming Zhang for the constructive comments. We also thank Wenting Xu for her contribution to data collection. This research did not receive any grant from funding agencies in the public, commercial, or non-profit organizations.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The ABS issuance in Europe and US were 275.1 billion USD and 5,166.5 billion USD in 2021 respectively. (Source: The Association for Financial Markets in Europe (AFME) for the European data and Securities Industry and Financial Markets Association (SIFMA) for the US data)..

² We will use these two terms interchangeably in this article.

³ Some of the issuers of Enterprise ABS are non-bank financial institutions such as leasing companies and petty loan firms.

⁴ The remainder of the ABS is mostly in asset-backed medium-term notes (ABN). ABN is under the supervision of the People’s Bank of China..

⁵ These firms are under the regulation of CSRC instead of CBRC.

⁶ The Negative List Guidelines specify the types of underlying assets that do not meet the regulatory requirements for asset securitization. For example, underlying assets with high cash flow uncertainty, such as income from mineral resource mining and land transfer are prohibited. The asset classes not mentioned in the List are generally seen as permitted.

⁷ We use the weighted average interest rate on all corporate bank loans from the previous year as a proxy for the ABS originators’ alternative cost of borrowing, assuming that these firms were able to access bank loans at the weighted average interest rate. This data is provided by the People’s Bank of China on an annual basis.

⁸ In 3% of the sample, the financing spread equals zero.

⁹ We present further analysis in section 3.1 and section 4.

¹⁰ Since the weighted average maturity for Enterprise ABS is 2.87 years (subordinate class excluded), we use the interest rates of three-year corporate bonds to represent the financing costs.

¹¹ The ABS issuance in 2005 and 2006 (nine projects) were excluded due to missing data on firm characteristics. The market was interrupted afterwards due to the financial crisis so there was no ABS issuance during 2007–2010.

¹² According to the classification standard published by the National Bureau of Statistics of China, firms with total assets less than 1.2 billion RMB are typically considered SMEs although the exact threshold depends on the industry. Note however, for most of the industries the threshold is lower than 1.2 billion RMB. About 46% of the sample has total assets less than 1.2 billion suggesting that at least 46% of the sample are SMEs..

¹³ To reduce the potential endogeneity problem, we run the regressions with all firm-level explanatory variables lagged by one period.

¹⁴ As a robustness check, we also used leverage (defined as total liabilities/total assets) as an alternative proxy for financing constraints and run regressions replacing fixed assets ratio by leverage. The results are qualitatively unchanged. We find that ABS issuance volume and ratio are positively related to financing spread. In addition, issuance ratio is negatively related to firm size and leverage, suggesting that smaller firms and firms with lower leverage issue more ABS relative to their size.