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Synthetic Securitization in China
China recently launched two offerings of asset backed securities ('ABS') in its interbank market after several years of preparation and planning. On Dec. 9, 2005, China Construction Bank ('CCB') issued 2.9 billion yuan ($360 million) of debt securities in China's first residential mortgage-backed securitization, and on Dec. 12, 2005, China Development Bank ('CDB') issued 4.2 billion yuan ($500 million) of debt securities backed by unsecured loans from the telecommunications, energy, utility, and transportation industries. To facilitate ABS offerings, China's regulatory agencies have promulgated rules to govern ABS issuances, including the Administrative Rules for Pilot Securitization of Credit Assets, promulgated by the People's Bank of China ('PBOC') and China Banking Regulatory Commission ('CBRC') on April 20, 2005, the Rules for the Information Disclosure of Asset-Backed Securities, promulgated by the PBOC on June 13, 2005, and Rules for Regulating Financial Institution's Securitization, promulgated by the CBRC on Dec. 1, 2005.
Despite China's significant progress in creating a legal framework for securitization, traditional securitization still faces numerous legal and operational obstacles in China. Significant restrictions on the transfer of financial assets remain. Certain fundamental bankruptcy issues relating to substantive consolidation and true sale remain to be addressed. The process to foreclose upon and liquidate collateral in mortgage-backed securitizations is not securitization-friendly. Borrowers must be notified before a mortgage can be assigned to a trust. Requiring a bank to sell its loans to a third-party special purpose vehicle ('SPV') is a fundamental requirement for a securitization to occur, but under Chinese business practices, doing so may compromise a bank's customer relationships.
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