Battling with 'Lemon Problem': Investors Protection in the Chinese ABS Market

• Author: Gao Simin
• Pages: 252-272

GAO (DO NOT DELETE) 15/12/9 12:20 PM

252 TSINGHUA CHINA LAW REVIEW [Vol. 7:251

BATTLING WITH “LEMON PROBLEM”: INVESTORS

PROTECTION IN CHINESE ABS MARKET

GAO Simin

A breakthrough reform is undergoing in Chinese capital market: a

proposal to modify the current security law is under the review of the

National People’s Congress, which attempts to the current offering

system from approval system to the registration system.1 If such

proposal is approved by the National People’s Congress, then

China’s security regime will enter a new post- registration time. In

the post-registration time, the securities regulators would not focus

on keeping the gate and the offering and play the role as the allocator

of financial resources. Instead, they need to focus on the investors’

protection, which should be the center of the regulation of Chinese

capital market. The core issue of the investors’ protection would be

the information asymmetry problem, which haunts over the relation

of the issuers and the investors. The asset back security (ABS)

business is an emerging business in China. The information

asymmetry problem is significant in ABS market due to the

complexity and the opacity of securitization. This article will take

ABS as an example to explore the information asymmetry problem

in Chinese ABS market and seek for solutions. The first part of this

article provides a snapshot of ABS market in China. The second part

discusses the functions, benefits and concerns of ABS via the lens of

Lemon Market Theory. Then, the article comments on the CSRC’s

rules of the disclosure regarding the underline assets, which is

apparently pioneering but unfortunately still a platitude. Part Four

analyzes the dilemma of signaling and screening and explores

possible alternative solutions by allocating risks to originators. The

last part concludes.

I. A SNAPSHOT OF ABS MARKET IN CHINA

Securitization is a pool of homogeneous financial cash flow by

producing illiquid assets and issuing claims on those assets in the

form of marketable securities.2 The securitization began in China at

1 See “Zhengquan Fa” Tijiao Renda Shenyi (“证劵法”提交人大审议) [Security Law submitted to

People's Congress for Review], NETEASE (May 21, 2015), http://news.163.com/15/0421/01/

ANMIOLOK00014AED.html.

2 The securitization of credit assets refers to an activity of structured finance, under which the

banking financial institutions (the originator) will entrust the credit assets to the trustee institutions, and

then such trustee institutions will issue and sell the be neficiary securities to the investment institutions

in the form of asset-backed security (the “ABS”) and will use the cash derived from such credit assets to

pay the returns on the ABS.

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2015] CHINESE ABS MARKET 253

the end of 2004 when the Chinese Securities Regulatory Commission

(CSRC) issued the rule of the pilot for the securitization. 3 The

blueprint of regulators is to test the risks of securitization business in

some pilots under the close supervision by regulators. If the risks of

securitization are acceptable for market and regulatory regime to

afford, then the regulators would expand the entry for more

participants to get into the market. However, the experiment of

securitization was suspended in 2008 in China due to the panic of

global financial crisis.4 The securitization was restarted in 2012.5

The market of ABS gained a fast growth in 2014. Beginning from the

end of 2014, the offering system of ABS was changed from the

approval system to the registration system: the Chinese Banking

Regulatory Commission (CBRC) issued a notice that the ABS of

credit assets needed to be registered with the CBRC and CBRC

would not review the quality of the underline assets any more.6 The

People’s Bank of China (PBOC)7and CSRC also issued a similar rule

to replace the approval system with the registration system. 8 In

post-registration time, the ABS market is expected to expand fast and

the next decade may the golden decade for ABS in China.9 As the

estimation by Moody’s, the total asset of the ABS market will reach

around 500 billion in 2015.10

3 See Guanyu Zhengquan Gongsi Kaizhan Zichan Zhengquan Hua Yewu Shidian Youguan Wenti

de Tongzhi (关于证券公司开展资产证券化业务试点有关问题的通知) [Notice on some issues of the

pilots of the Securitization Business of Securities Companies] (promulgated by China Sec. Reg.

Commission., Oct. 21, 2004, effective Oct. 21, 2004) (Chinalawinfo).

4"See Mudi Yuce 2015 Zhongguo Zichan Zhengquan Hua Chanpin Guimo Chao 500 Yi (穆迪预测

2015中国资产证券化产品规模超5000亿) [Moody's Estimate that the Securities Products in China

Would Be More Than 50 Billion], SINA FINANCE (Mar. 4, 2015), http://finance.sina.com.cn/money/"

bond/20150304/011921636864.shtml"[hereinafter"Moody].

5 See Wang Xiaoqiao (王小乔), ZiChan Zehngquan Hua Jiannan Chongqi (资产证券化艰难重启)

[Restarting the Securitization with Hardship], NANFANG ZHOUMO (南方周末) [SOUTH WEEKEND],

(Oct. 27, 2012), available at http://www.infzm.com/content/82279.

6 See Guanyu Xindai Zichan Zhengquan Hua Beian Dengji Gongzuo Liucheng de Tongzhi (关于

信贷资产证券化备案登记工作流程的通知) [The notice of the Procedures of Registration of the

Credit Asset Securitization] (promulgated by China Banking Reg. Commission, Nov. 20, 2014,

effective Nov. 20, 2014) art. 2 (Chinalawinfo).

7 See Zhongguo Renmin Yinhang Gonggao Diqi Hao (中国人民银行公告第7号) [The No.7

Notice by People’s Bank of China] (promulgated by People’s Bank of China, Mar. 26, 2015, effective

Mar. 26, 2015) (Chinalawinfo)

8 See Zhengquan Gongsi Ji Jijin Guanli Gongsi Zigongsi Zichan Zhengquan Hua Yewu Guanli

Guiding ( 证券公司及基金管理公司子公司资产证券化业务管理规定) [Provisions for the

Administration of the Asset Securitization Business of Securities Companies and the Subsidiaries of

Fund Management Companies] (promulgated by China Sec. Reg. Commission, Nov. 19, 2014, effective

Nov. 19, 2014) (Chinalawinfo).

9 See Feng Guanghua, Zhongguo Zichan Zhengquan Hua Shichang Youwang Yinglai “Huangjin

Shinian” (冯光华：中国资产证券化市场有望迎来“黄金十年”) [Guanghua Feng, The Chinese

Securitization Market May have the golden Decade], EASTMONEY NET (Apr. 22, 2015), http://

finance.eastmoney.com/news/1353,20150422499766961.html.

10 Moody, supra note 4.