As China's banking reform accelerates ahead of the full opening up of the local market to foreign banks in 2007, financial institutions and analysts are urging for a faster pace in introducing asset securitization to facilitate reform efforts.

Participants at a high-profile seminar Tuesday agreed that securitization, especially that of problem loans, could help Chinese banks improve their capital adequacy levels and quicken the resolution of the massive non-performing loans (NPLs) issue.

Since it originated in the 1970s, asset securitization has now become a popular financing technique in developed countries. But China's financial authorities have not allowed financial institutions to conduct securitization largely due to legal barriers and risk concerns, although banks and asset management companies have been pushing hard to try the efficient tool.

"It's time that pilot programs are quickened," Yang Kaisheng, president of China Huarong Asset Management Corporation, said at the 2004 China Securitization Forum held Tuesday.

"To contain risks, we can start with private placements," he added.

As a structured financing technique that repackages the cash flow generated from underlying assets into tradable securities, asset securitization could help Chinese banks raise capital adequacy ratios by transforming liquid assets into securities, experts said.

Most Chinese banks fail to meet an 8 percent minimum requirement of capital adequacy. Furthermore, their rapidly-growing loan portfolios, part of which are feared prone to go sour, keep bringing down capital adequacy ratios.

The technique is especially needed by China's four asset management companies (AMCs), including Yang's, to quicken their disposal of NPLs transferred from the nation's four State-owned commercial banks, and reduce disposal costs.

By the end of last year, the four AMCs had disposed of nearly 50 percent of the combined 1.4 trillion yuan (US$169 billion) of NPLs they took over four years ago. The pace needs to be quickened as they are expected to finish the job by 2006.

"We have been mainly collecting the debt with a door-to-door approach," Yang said. "Securitization is likely to be an important alternative to quicken the process."

Suspicion still exists among some Chinese government officials and scholars about the applicability of securitization in the case of NPLs, which many fear are incapable of generating stable cash flow to make securitization work.

China Huarong launched a pioneering deal last year by repackaging 256 NPLs, worth a combined 13.2 billion yuan (US$1.6 billion), into a trust programme. The transaction resembled a securitization programme.

The deal brought Huarong 1 billion yuan (US$120 million) in immediate cash payments, and is continuing to pay interests as agreed upon.

The deal also provided adequate liquidity for investors, with 80 percent of the trust certificates having changed hands, sources familiar with the deal said.

(China Daily April 7, 2004)