Asset-backed securities and its dangers on the rise – Ann Rutledge

China´s financial authorities are reviving so-called asset-backed securities (ABS) in a moderate pace. But ABS-expert Ann Rutledge warns in the China Economic Review against the dangers of this financial tool in the murky China financial markets.

The China Economic Review:

In June, Reuters reported that the China Banking Regulatory Commission had granted provincial branches permission to green-light new issuance for cities’ commercial banks for their ABS plans—though big banks apparently still needed issuance approval from the commission’s headquarters in Beijing.

Yet even those approved by the banking regulator remain opaque by the basest standards of international ABS investing, Rutledge said, adding that local knowledge of the routines industry analysts typically use to rate the different batches produced by securitizations was sketchy in China at best.

“People are doing deals and the deals seem to work, but one of the reasons the deals are working is because the high-performing collateral is what’s being securitized,” said Rutledge. That could change.

Moreover, cordoning off financial institutions’ ABS trading to the interbank market also means they ostensibly aren’t helping disperse risk that is concentrated in the banking sector, instead serving largely to help banks ease pressure on their balance sheets.

But Rutledge cautioned against taking for granted that such restrictions were always observed in practice. Without more performance data transparency, she said, it will remain difficult to judge whether cash flows are as healthy as claimed and going where they’re supposed to.

“When people want to see a market grow they’ll say anything, and they’ll turn a blind eye to things that are obviously problematic,” Rutledge said. “You can’t put a fence up and expect it to contain water. Water flows. Money flows.”