Knowledge Work on Secritization in the People's Republic of China
Gaitskell, Bruce; Conrad, Jurgen | July 2016
Ongoing reforms of local government financing in the People’s Republic of China could involve securitization of infrastructure assets, in particular commercial property, which has already proved successful in developing and developed economies around the world. After the global financial crisis, regulation of the securitization market was improved, for example in the United States and in Europe with better regulation of rating agencies which play an important role in securitization. Regulation obliging originators to retain some risk in each transaction and investors to conduct individual due diligence has also contributed to making securitization much safer. Securitization of commercial real estate (CRE) assets, including offices and retail premises, encompasses (i) a revenue stream sufficient to maintain interest payments and cover third-party costs and (ii) security over a physical building or buildings so that funds can be realized in the event of a default. It is also important to consider the efficiency of the transaction relative to alternative methods of financing. Several countries have created government-supported enterprises to develop large CRE securitization markets. A potential mechanism to create a revenue stream for social CRE assets is for a local government to sell them to and lease them back from a special purpose vehicle. This sale and leaseback, however, does not address the refinancing risk at maturity nor the concentration risk deriving from the fact that the securitization income comes from local government entities rather than a mix of commercial enterprises. Some form of government support might thus be needed to overcome these two risks. The use of securitization by local governments in the People’s Republic of China has the potential to be a major contributor to public finance reform. A government-sponsored securitization market has the potential to be very large, liquid, and sustainable across the economic cycle.
CitationGaitskell, Bruce; Conrad, Jurgen. 2016. Knowledge Work on Secritization in the People's Republic of China. © Asian Development Bank. http://hdl.handle.net/11540/8863.
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