China is expanding asset securitisation:

  • Regulators plan to grant quotas totalling 300 to 400 billion yuan ($49-66 billion) for firms to sell asset-backed securities (ABS) in coming years
  • This will increase bank liquidity without expanding the money supply, and will shift risk away from the banking system, reducing the chances of a financial crisis as economic growth slows and bad loans rise

  • The quota will equal the total outstanding value of the central bank’s Short-term Lending Facility, a channel through which the central bank provides liquidity to the banking system, modelled after the U.S. Federal Reserve’s discount window.

  • For example, China Development Bank (the policy bank that funds infrastructure projects) sold 8 billion yuan in securities backed by the bank’s loans to the state railway operator on Monday
  • After the expansion the ABS programme will still be tiny compared with China’s money supply – there is huge potential for future growth