This fall, one of the two big bank securitization projects in progress is the MBS project of China Construction Bank. The Special Purpose Trust that will handle the underlying assets of the securitization is the CITIC Trust Co., based in Beijing.
CITIC has 80 employees and, as of the end of 2004, RMB8.6 billion ($1.06 billion) in total entrusted assets. It is part of the CITIC Group, a state-owned conglomerate, formerly known as the China International Trust & Investment Corp.
“Abundant operational experience, advanced account management system, complete trust-management and risk-control add to our strength,” said CITIC Vice President Haixing Yao, who heads the securitization department. “All of these make us qualified and help us stand out.”
CITIC had begun to pursue the project two years before it even received regulatory approval. “We proposed the idea, drafted the project, and even worked on designing the whole process,” she said, adding that the fact that CITIC was selected to be its trust provider is a sign that it was doing a good job. “They show their approval of our capacity to handle this kind of transaction and also their confidence in us,” she added.
CITIC first began gauging the securitization market in the 1990s, but didn’t move into practical applications until China issued its Trust Law in 2001.
Between 1979 – when Deng Xiaoping opened up China to the West and began the transition to a market-based environment – and 1999, there were five stages of regulatory reform in the financial industry before the current legal and supervisory framework was finally laid.
The 2001 Trust Law gives special status to trust and investment companies, said Hongjun Ji, vice president of Zhongyun Trust & Investment Co.
He said that a trust and investment company serves as a natural special purpose vehicle in the structure of asset securitization, according to the Trust Law in China. This allows the transfer of the underlying assets to a separate entity, which offers protection for investors.
Should the China Construction Bank project goes through as expected, it will be the first trust MBS securitization project in China. But it wouldn’t be the first time that CITIC has broken new ground. In 2003, China International Trust & Investment worked with the Huarong Asset Management Co. on a RMB13.2 billion deal.
It was the first time that the concept of ABS was applied in the disposal of non-performing assets, said Rong Li, a research analyst at Shanghai-based Shenyin & Wanguo Securities, who has written an in-depth study about the deal.
An advanced project at the time, China International Trust & Investment played the role of a trust vehicle in that project as well. “It employed strict asset separation between the [asset manager] and CITIC, as well as definitive identification of cashflow through a subordinated pass-through structure,” she said.
Huarong transferred the relevant assets to the CITIC Trust, and CITIC Trust organized the trust and issued securities based on the Huarong assets.
Huarong Asset Management received the right of claim to the securities in its entirety, and investors were entitled to share in those benefits through Huarong Asset Management, which possessed exclusive rights to the distribution of the securities for placement with institutional or retail accounts.
However, according to CITIC Trust’s Yao, because government policies on accounting, taxes, currency, and trust registration had yet to be issued, it could only be called a “pre-asset securitization” project.
“There was no promulgation of related laws or regulations,” according to Yao. “So there was a glass-ceiling for the whole industry, not just our company.”
But as Huarong CEO Kaisheng Yang said at the 2004 Asset Securitization Forum, while the project did not completely qualify as an asset securitization, it was undoubtedly an important step in the right direction.
Looking into the future…
The securitization market is ready to soar, said CITIC’s Yao. “We believe there is huge potential in the market.”
As Basel II increases requirements for capital sufficiency in the banking industry, the desire by banks to enhance the capital ratios and to improve balance sheets is getting increasingly stronger.
“Securitization represents one effective tool to help achieve these objectives,” she said. “And we’ve seen increasing interest from commercial banks and other financial institutions.”
Looking to the future, she expressed her confidence, especially as the legal framework in this sector gradually improves.
“We are willing to do everything we can to satisfy burgeoning requirements from our clients,” she said. “Even in new areas that we’ve never tried before.”
(Wendy Yu contributed to this report.)