Produced by Iris Suen, Annie Wu, and Maggie Yang for S&P Global on March 12, 2019.

After a slow start in 2009, auto loan securitization has grown rapidly in Chinese markets. Investors benefited from the stable credit performance of the underlying auto loan portfolios, and auto financiers’ ongoing funding needs supported the growth of the auto loan asset-backed securities (ABS) market.

S&P Global Ratings considered the impact of several economic, regulatory, and market factors on the development and performance of the China auto loan ABS. Analysts found that infrastructure investment and consumption supported moderate economic growth, allowing for steady GDP performance and stable employment rates. Strong asset performance followed, and declining market interest rates fueled securitization issuance through 2018. Despite a rising household debt burden, sustained household income and deposit growth supported debt serviceability.

The Chinese auto market industry 1%-2% growth in passenger vehicle sales volume in 2019; 3%-4% growth is anticipated through 2020, boosting market performance. Regulators remain supportive of auto financing and ABS securitization, and some deregulation is expected amid a slowing economy and trade uncertainties. Financiers continue to enhance their underwriting and risk control practices, underpinning the robustness of asset performance in Chinese auto loan ABS.

For continued growth, the market must see more variety and diversity in future assets. S&P recommends add-on value loans and used-car loans as a start. Assuming that financiers’ need for funding, auto loan ABS will remain an important funding tool for financiers to diversify their funding and investment channels.   China’s low cumulative default rate and net losses reflect the strong asset performance of auto loan ABS. Shorter tenor loans and sequential repayment deal arrangements limit the duration of ABS notes, minimizing investors’ exposure to credit risks. S&P expects that increasing penetration of auto financing will support the growth of the auto loan ABS market in China.

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