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Growth of ABS opportunities in Asian markets

Navita Yadav, our Global Sector Lead for Capital Markets has contributed to The Securitisation & Structured Finance Handbook for its 10th Edition. The piece explores the state-of-play in China, Singapore, Japan and India.

An excerpt is below, and you can find the full article with per-country analysis in the PDF at the bottom of the page. 

"Securitisation benefits the economy by bringing financial markets and capital markets together. Financial assets are created in the financial markets, e.g. banks or mortgage financing companies. These assets are traditionally refinanced on on-balance-sheet means of funding of the respective banks. Securitisation connects the capital markets and financial markets by converting these financial assets into capital market commodities. The agency and intermediation costs are thereby reduced. It is clear, however, that the securitisation markets in Asia are not as deep as those in the US or Europe, though there is now significant increasing interest, on the one hand, among investors in Asia looking at investing in US and European securitisations and, on the other hand, among issuers in Asia putting in place securitisation structures which will appeal to US and European investors. Several markets in Asia have established securitisation frameworks with varying degrees of sophistication over the years, but the fact remains that it is an under-utilised market. Asia’s economies have learnt from the past and have taken measures over the years to make their markets more resilient.

Securitisation creates an alternative investment product for investors. By repackaging assets which would otherwise be illiquid (such as auto-loans or infrastructure debt) a securitisation opens up these types of investments to arrange of participants in the capital markets who would otherwise not have been able to have that exposure. In some economies around Asia, banks are highly leveraged and there is a desire on the part of governments, regulators and the banks themselves to reduce that leverage.

Securitisation can be a very useful tool to help achieve that. In the decade following the 2008 global financial crisis, securitised assets in the US have undergone significant reforms. Changes to market practices and regulation have resulted in greater transparency and reduced risk. As a result, interest in securitised products is beginning to grow among Asian institutional investors keen to juice up their portfolio. Securitisation is a developing financing tool in Asia; the method of its adoption has varied throughout the region, where some jurisdictions, such as China, Korea and Japan, have implemented special legal regimes, while others, such as Hong Kong and Singapore, have made use of existing laws, with some special cases, such as the regulatory covered bond regime in Singapore. Financial institutions and corporates equally make different uses of securitisation, with some using it for funding, others for regulatory capital relief and others for balance sheet management. Regulators in Asia are taking a balanced and thoughtful approach. In Hong Kong and Singapore, for instance, the HKMA and MAS have been implementing the Basel securitisation framework, and in China, using a quota system to try our different types of securitised product before making them more widely available. Asian markets have the greatest growth opportunity and could gain the largest share of global capital markets over the next few decades. The average global share of Asian capital markets is expected to increase from 31% in 2017 to as much as 49% in 20 years, with half the growth expected to come from China, according to a global capital markets index. China has certainly stolen the show being the front runner, but across all of Asia regions there has been noteworthy progress. India has put in place key reforms, policies and some bold moves like prescribing minimum borrowings through debt capital markets while further opening up to foreign investment, Myanmar launched its stock exchange in Yangon in December 2015 and has since hosted number of IPOs. Vietnam is still divesting the state’s holdings in some of its biggest conglomerates, while countries such as Indonesia, the Philippines and Malaysia are making strides towards infrastructure development." 

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