Asset-backed issues 'can expand H2 fund supply'

Efforts to accelerate the development of asset-backed securitization in China will help both lenders and borrowers if credit conditions tighten in the second half of 2013, analysts said.

Given slowing economic growth and the aftereffects of the liquidity crunch in June, credit conditions may be tight during the remainder of the year, said Oliver Chiu, head of research and investment advisory of retail banking in the global consumer group with Citibank (China) Co Ltd.

"The recent removal of lending rate floors may have a limited impact on funding conditions as a whole. On the other hand, if more assets are securitized, more credit potential will be released," said Chiu.

The recent liquidity crunch may constrain small lenders' off-balance-sheet business, said Chiu.

Citibank estimates total social funding this year at 18 trillion yuan ($2.93 trillion), said Chiu. Chiu said instead of pumping more cash into the economy through monetary easing, decision makers may be more likely to introduce policies that will make full use of existing credit.

Asset-backed securitization will become a regular function instead of a pilot program, according to a circular from the State Council released on July 5 on supporting economic transformation and upgrading.

The circular, which includes 10 guidelines on how monetary and financial policy can stabilize growth and reduce economic and financial risks, said the misallocation of capital is hampering economic restructuring.

It also called for more credit support for upgrading, consumption and urbanization-related infrastructure.

China needs more efficient credit allocation, according to Jian Chang, an analyst at Barclays Research.

"Money supply growth fell to 14 percent year-on-year in June, from 15.8 percent previously, and the sharp drop was in part because of a high base, as savings deposits rose sharply in June 2012.

"However, we think it also reflects the People's Bank of China's policy bias for tighter liquidity from here on, compared with earlier in the year.

"We note that the 2013 target for M2 growth is 13 percent," said Chang.

The recent interest rate liberalization move was less extensive than expected, according to May Yan, an analyst with Barclays Research.

"Banks have not been competing on lending rates for business... Banks have been competing rationally as they know pricing competition is going to hurt the industry and themselves," Yan said.

Chiu said tightened credit may significantly affect investment.

Although the central government might not launch another large program to spur growth, local governments may start more provincial- or city-level projects to boost economic growth and maintain employment, said Chiu.