The size of China-related asset-backed securities (ABS) in the South Korean financial investment sector is dropping at a rapid pace as South Korean investors are not reinvesting due to mounting concerns over Chinese bond defaults.
The outstanding asset-backed commercial paper (ABCP) and asset-backed short-term bond (ABSTB) based on Chinese banks’ and enterprises’ time deposits and bonds stood at 1,533.7 billion won on Dec. 20 whereas the size amounted to 4.84 trillion won at the end of June.
Most of the ABCP and ABSTB have maturity of one year and those based on time deposits account for 99.9 percent of the total. Those are based on the deposits and savings of Chinese banks such as Bank of Communications, Bank of China and China Construction Bank and ABS based on corporate loans stand at 800 million won.
In most cases, ABS are complex in structure and thus securities companies acting as lead managers get high commissions. China-related ABS issuance is large in size and securities companies are estimated to have received large commission income. However, South Korean securities companies set the maturity of China-related ABS to less than three months on a conclusion that the Chinese economy is facing a lot of uncertainties. In other words, they focused more on Chinese bond default risks than on commission income.
In fact, international credit rating agency Moody’s recently warned that China’s corporate debts are currently the most significant threat to the global economy. “The liabilities affect financial systems and the economy as a whole and Chinese enterprises with more liabilities are bigger threats,” said Moody’s senior economist Mark Zandi, adding, “The debts in the country are increasing very fast at this moment.”
Likewise, Fitch Ratings recently said that private Chinese companies are failing to deal with their debts and China’s debenture default is likely to reach a record high next year.