The headquarters of the People's Bank of China in Beijing. The PBOC is likely to launch a pilot program that allows some commercial lenders to securitize assets. The trial could involve a securitized quota of 50 billion yuan ($7.9 billion). [Photo/China Daily]

Reports: The program could involve securitized quota of $7.9 billion

China is conducting a new pilot program that allows some commercial lenders to securitize assets, said a senior central bank official on Wednesday.

"Based on the results of the pilot program, we would gradually promote asset securitization," said Jin Qi, assistant governor of the People's Bank of China. She declined to give further details.

Securitization is a process that involves packaging the anticipated cash flows of instruments such as loans or receivables into asset-backed securities, which are then sold to investors. It is one of the ways in which assets can be hedged in a derivative market.

Previous reports in the domestic media have said that the trial would involve a securitized quota of 50 billion yuan ($7.9 billion).

This trial is likely to expand the pool of allowable assets to include loans to local government financing vehicles and small- and medium-sized enterprises.

In 2005, the government announced a pilot plan that allowed China Development Bank Corp to securitize its loan assets and China Construction Bank Corp to securitize its mortgage loans.

In the following two years, the range of the pilot program broadened to include some joint-stock commercial banks, investment banks such as China International Capital Corp Ltd, some securities firms and other financial institutions.

However, the process was suspended amid the financial crisis, as the government became more prudent about exploring new financial instruments.

Li Daokui, a professor at Tsinghua University and academic adviser to the PBOC's monetary policy committee, said it is wrong to see asset securitization as the root cause of the financial crisis.

"Asset securitization is the road one must follow to achieve modern finance. The key is how to regulate it in a proper manner."

Asset securitization could help banks transform illiquid assets into liquid ones and thereby allocate their capital more efficiently, said Li.

"It also helps banks access diverse and cost-effective funding sources," he said.

In 2011, commercial lenders listed on Chinese stock exchanges raised 469 billion yuan through the capital market.

China's banks sold a combined 330 billion yuan in subordinated debt last year to replenish their capital.

"Asset securitization is also a good tool to improve the liquidity of assets and contain systemic risks among banks," which are relatively high at present, said Dong Wenbiao, president of China Minsheng Banking Corp Ltd.

Securitization also offers banks a means of reducing dependence on the net interest margin and diversify their profit models, he said.

But officials at the China Banking Regulatory Commission were less positive about the benefits of securitization.

Yan Qingmin, assistant chairman of the commission and a member of the Chinese People's Political Consultative Conference National Committee, said that it would be very dangerous if banks bypass credit regulations through securitizing their assets.

"They may mix bad assets with those assets that meet regulators' requirements (together) in a package, because to banks, the most creditworthy assets actually don't need to be securitized."

He said both specific guidelines on banks and a fixed yield curve based on actual market conditions that would have true reference value for investors are needed for the government to take the next move.

wangxiaotian@chinadaily.com.cn