ABS online platform would be vital for developing bonds' OTC market

By Wu Zheyu | chinadaily.com.cn | Updated: 2016-09-30 14:38

Cao Tong, the chairman of Xiamen International Financial Technologies Ltd, is delivering a speech.[Photo provided to chinadaily.com.cn]

Reporter's note:

Before interviewing Cao Tong, the chairman of Xiamen International Financial Technologies Ltd, a firm whose main business is building an online platform for Asset-backed security (ABS) products, several financial reporters told me that it would be definitely a good chance to ask him why he gave up his high-profile career in the banking industry and decided to devote himself to internet finance. Cao Tong has long been known as a young backbone in China's banking system. He used to be the vice-president of Exim Bank of China until 2014, and was also the vice-president of China Citic Bank for more than six years. In 2015, he worked as president of Webank, the first Internet Bank in China which is initiated by Tencent Company and used to be encouraged by Premier Li Keqiang as: "leading as a pioneering role in Internet Finance industry." In a wide-ranging interview, he discussed the potential market of China's ABS products, and his philosophy about how internet finance would deeply effect or even become a game changer for the industry.

1, We noticed that ABS products have been quite hot in recent years. In the 2016 ranking of financial institutes who issued ABS products, the ABS products of seven institutes reached over tens of billions of yuan. What's the reason behind this boom? How would you evaluate the future volume of this market?

China's ABS market is different from those of western countries, especially at a time when most corporates are processing transformation, which means massive corporates are stepping into professional financing market. Naturally, not only highly rated corporates have the need of financing, the structure of the corporates in need may include multiple layers.

You could see ABS as a kind of financial product, or a technology, even a theory. Fundamentally, it needs to separate the credit rating part from rating the corporate itself, hence evaluate, separate and match the risks of the assets. So if you observe this technology theoretically, it's really suitable for those high performing companies to finance during economic downturn, it also offers opportunities for many ordinary companies or even some less competitive ones.

It means good companies naturally could own good assets to cope with the economic downturn, while, on the other hand, badly performing companies could also own high-quality assets to cope with any economic cycle. So ABS is a way of financing which is aimed at assets itself, instead of variety of corporates. If you see ABS as purely a theory, technology or a financial product, it may offer quite a solution for most companies, especially at this stage of our economy. During this round of our country's economic transformation, we estimate that the gross volume of bond traded products for direct financing would continue to expand, which would reach 200 trillion yuan in the next few years. Among these products we predict there exists 100 trillion yuan that needs to process asset securitization. To facilitate such a huge share of market's development definitely has the need of solid infrastructure building, such as constructing provincial-level assets trading platform, implementing asset securitization, or formulating detailed regulations and systems by authority, and better theory construction.

2, Some expert have claimed that the dilemma we are faced with when fostering asset securitization in China is that authorities still offer bail-out with implicit guarantees, which makes ABS products lose their competitiveness, and that's the reason why Chinese ABS products are not able to follow the principle of risk-based pricing. What's your view?

The necessity to breakdown this kind of bail-out with implicit guarantees has no doubt. Because it's even hard to imagine that there's no risk to buy a trading product, definitely it has risks fundamentally. The key solution to this problem is to build a mechanism that could achieve effective risk diversification. While ABS's strengths might be exactly one part of the right answer.

Initially, let's assume that we break down this kind of bailing out, that more risks may exist among market, while if you look into those products that in risks, most of them are not ABS. Secondly, through asset securitization, products are naturally classified into levels like Senior Tranch and Mezzanine Tranch, so as for average investors, they should choose the products labeled as Senior Tranch, let the professional investors operate with products rated as high-risks. Thirdly, I don't encourage ABS products to be promoted to individual buyers, the concept of "Accredited Investor" is really necessary, there should be a access threshold. This kind of product should not be separated into many tiny parts then sell them to average investors, it should match with qualified professional investors.

3, You have said that the biggest challenge for internet finance's development is the lack of infrastructure building. What you're really pursuing is to constructing a B2B internet finance platform, which is an asset securitization platform for over-the-counter (OTC) market of fixed income capital, and then formulating the standards by offering series of services, like credit rating and investigation, assets collection and liquidation. What achievements and challenges have you come through building your ABS platform so far?

We have devoted around a year to developing this online ABS system, the whole meaning we contribute so much human resources, time and energy to do it is to match it with bonds' over-the-counter (OTC) market, which could understood as those provincial-level assets trading platforms. This share of market's growing prosperous also matches with the trend of the whole finance industry. So among the whole project, the core technologies include financial engineering and information techniques, which help generate ABS products then to trade them effectively.

If we observe the current ABS products in the market, the ways of transforming a underlying assets into trading product include online and offline. Most ones use the offline mode, like traditional investment bank, usually take at least 3-4 months to accomplish a product, and with so much human resources put into, the transaction cost would be hard to cut down. So we're trying to figure out whether there could come up with a solution to make such a long chain offline trade more simple and flexible, and the standard should be unified for both online and offline.

So by providing this ABS online platform, we endeavor to show how to process the underlying assets' key parameters through variety of risk valuation models, and then formulate the primary speciation of a product, then it could be interacted among institutes like law firms, rating agencies, securities companies, trust agencies and so on, which also include regulators, hence to make this product tradable. The vital strengths of this platform are shortening of production cycle and cutting down of transaction cost.

The main challenge for us now is that the whole chain is too long, that involves bodies varying from underlying assets to investors. These bodies need to locate themselves in this process through coping with changing trend, and also the system has to adapt to different parties' needs. Our next step is to update this system's effectiveness to cater for variety of users' requirements.

4, Based on your experience in internet finance industry, how do you see this industry's future, and also how do you see the future innovation that might happen by using internet technology to manage credit risks?

Finance is really sensitive to information technology's development, like block chain technology is a representative example how internet deeply affect finance industry. My opinion is the core issue is how to use information technology to achieve updating and transformation of the market and individual participant, hence to find the new location of individual in the information market.

For example, in banking industry, there are over 4,200 banks in our country, while actually their ability to implement internet technology is diversified, so the digital gap between banks is increasingly widening. We used to say big fish eating small fish, then it deduces to fast-swimming fish eating slow-swimming fish, while for now you could compare it as technological fish would finally win.

As for the credit information collection and credit guarantee scheme, I regard these aspects as really important trend of future's development. The first problem is the volume. We could see that the amount of highly-rated credit consulting firms is still too small, their guarantee ability is still too limited. All the assets of 3A credit consulting firms add together would be no more than 100 billion RMB, which means they could only guarantee for 1 trillion RMB.

The second problem is the current credit investigation system is too static and divided, it stays as collecting financial conditions of companies, much effective information are buried among branches of government and commercial institutes in the market. A system built from more comprehensive sources would be needed to solve these problems.