ABS online platform would be vital for developing bonds' OTC market

Cao Tong, the chairman of Xiamen International Financial Technologies Ltd, is delivering a speech.[Photo provided to chinadaily.com.cn]

Reporter’s note:

Before interviewing Cao Tong, the chairman of Xiamen International Financial Technologies Ltd, a firm whose main business is building an online platform for Asset-backed security (ABS) products, several financial reporters told me that it would be definitely a good chance to ask him why he gave up his high-profile career in the banking industry and decided to devote himself to internet finance. Cao Tong has long been known as a young backbone in China’s banking system. He used to be the vice-president of Exim Bank of China until 2014, and was also the vice-president of China Citic Bank for more than six years. In 2015, he worked as president of Webank, the first Internet Bank in China which is initiated by Tencent Company and used to be encouraged by Premier Li Keqiang as: "leading as a pioneering role in Internet Finance industry." In a wide-ranging interview, he discussed the potential market of China’s ABS products, and his philosophy about how internet finance would deeply effect or even become a game changer for the industry.

1, We noticed that ABS products have been quite hot in recent years. In the 2016 ranking of financial institutes who issued ABS products, the ABS products of seven institutes reached over tens of billions of yuan. What’s the reason behind this boom? How would you evaluate the future volume of this market?

China’s ABS market is different from those of western countries, especially at a time when most corporates are processing transformation, which means massive corporates are stepping into professional financing market. Naturally, not only highly rated corporates have the need of financing, the structure of the corporates in need may include multiple layers.

You could see ABS as a kind of financial product, or a technology, even a theory. Fundamentally, it needs to separate the credit rating part from rating the corporate itself, hence evaluate, separate and match the risks of the assets. So if you observe this technology theoretically, it’s really suitable for those high performing companies to finance during economic downturn, it also offers opportunities for many ordinary companies or even some less competitive ones.

It means good companies naturally could own good assets to cope with the economic downturn, while, on the other hand, badly performing companies could also own high-quality assets to cope with any economic cycle. So ABS is a way of financing which is aimed at assets itself, instead of variety of corporates. If you see ABS as purely a theory, technology or a financial product, it may offer quite a solution for most companies, especially at this stage of our economy. During this round of our country’s economic transformation, we estimate that the gross volume of bond traded products for direct financing would continue to expand, which would reach 200 trillion yuan in the next few years. Among these products we predict there exists 100 trillion yuan that needs to process asset securitization. To facilitate such a huge share of market’s development definitely has the need of solid infrastructure building, such as constructing provincial-level assets trading platform, implementing asset securitization, or formulating detailed regulations and systems by authority, and better theory construction.

2, Some expert have claimed that the dilemma we are faced with when fostering asset securitization in China is that authorities still offer bail-out with implicit guarantees, which makes ABS products lose their competitiveness, and that’s the reason why Chinese ABS products are not able to follow the principle of risk-based pricing. What’s your view?

The necessity to breakdown this kind of bail-out with implicit guarantees has no doubt. Because it’s even hard to imagine that there’s no risk to buy a trading product, definitely it has risks fundamentally. The key solution to this problem is to build a mechanism that could achieve effective risk diversification. While ABS’s strengths might be exactly one part of the right answer.

Initially, let’s assume that we break down this kind of bailing out, that more risks may exist among market, while if you look into those products that in risks, most of them are not ABS. Secondly, through asset securitization, products are naturally classified into levels like Senior Tranch and Mezzanine Tranch, so as for average investors, they should choose the products labeled as Senior Tranch, let the professional investors operate with products rated as high-risks. Thirdly, I don’t encourage ABS products to be promoted to individual buyers, the concept of “Accredited Investor” is really necessary, there should be a access threshold. This kind of product should not be separated into many tiny parts then sell them to average investors, it should match with qualified professional investors.

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