Why securitization is vital to deepening China's credit market

However, investor base diversity is needed.

China's developing securitization market is playing a key role in deepening the country's credit market, but the diversity of the investor base needs to broaden to truly shift risks away from the domestic banks.

According to a release from Moody's Investors Service, its analysis was contained in its just-released report "Securitization Helps China's Credit Market Expand and Supports Balancing of Economic Growth, But Risks Remain in Banking System".

As Moody's report points out, securitization provides an alternative funding source for larger corporates and small-and-medium enterprises, and helps banks revitalize their balance sheets.

In addition, securitization provides an important source for lenders of consumer loans, who will, as a consequence, lend more money to consumers.

This assists in China's push to make domestic consumption a bigger driver of economic growth.

Here’s more from Moody’s Investors Service:

However, even though Chinese banks are securitizing assets to remove the associated risks from their balance sheets, they have not managed to entirely diversify the risks from the banking sector.

This is because a large majority of investors in securitization transactions in China are also the banks themselves. Hence, risk is simply shifted from one bank to the other.

In order to really re-distribute the risks away from the banking system, a diversification and deepening of the investor base are required.