Illustration: Lu Ting/GT

In a government work report delivered Thursday at the opening of the National People's Congress, Chinese Premier Li Keqiang announced that authorities intend to further promote credit asset securitization. Such statements from the highest level of government gave the market reason to believe that credit asset securitization would serve as an excellent source of opportunity over the year ahead.

In a broad sense, credit asset securitization refers to the process of packaging illiquid individual loans and other debt instruments - including corporate, consumer and auto loans - into liquid securities that can be openly traded among investors. Securitized loans have been important financial instruments in overseas markets for many years, yet such securities have only been tentatively pushed forward by Chinese authorities amid mounting demand for more innovative products.

Along with strengthening commercial banks' balance sheets and improving liquidity, securitized loans can also play an important role in the real economy by reducing funding costs. By repackaging loans (and the income they derive) for sale to investors, banks can be encouraged to lend more to small and medium-sized enterprises as well as companies in the agricultural sector, two areas that central authorities are keen to promote. Securitization could also be particularly useful for China as the process of economic transformation makes officials less inclined to loosen monetary policy despite a persistent need for funding.

China took its first substantive step toward loan securitization under a pilot program launched in 2005. The country's early securitization market was dealt a major blow though in 2008 by the global financial crisis, an event widely attributed to the misuse of overly complicated products such as securitized debts. The program was eventually relaunched in 2012. The following year, the China Banking Regulatory Commission ended its case-by-case approval mechanism and instead required banks merely to register their securitized-loan products with authorities before selling them off.

Looking ahead, loan securitization is expected to expand rapidly over the next several years as the government rolls out additional supportive measures while also relaxing its supervision over this area. According to reports, Chinese banks issued some 280 billion yuan ($44.77 billion) in securitized loans last year, up from just 16 billion yuan in 2013.

Ma Li, a managing director at Moody's Investors Service, predicted last week that this figure could reach 500 billion yuan in 2015. And according to Haitong Securities estimates, China's market for securitized credit assets could potentially reach 2 trillion yuan. CICC put forward similar views based on the fact that securitized assets in China represent only about 0.5 percent of the country's GDP, compared with 60 percent in the US.

But while asset securitization is primed for continued growth, there are still several obstacles that need to be overcome. First, government supervisors only allow high-quality assets to be securitized. Many banks would rather keep these top-grade loans on their books and instead repackage riskier assets in order to improve their asset structure. Investors, for their part, are also affected since many would prefer to invest in products with high-yield underlying loans.

Second, the market for securitized loans is still quite small, with trading limited to a small number of qualified banking institutions. Similarly, most securitized loans are backed only by corporate debts. Hu Jian, a managing director at Moody's, predicted that more new assets classes and issuers - including foreign-funded banks, leasing agencies and asset management companies - are expected to come forward this year, which should put a more diverse array of products up for trading. CCXI, a local ratings firm, has also predicted the imminent arrival of securitized mortgage loans, syndicated credit packages and other assets.

Compared with mature overseas markets, China's market for securitized loans is still in its infancy. For example, in the US, loan securitization began in the 1960s. Yet China is in a good position, since it can learn from decades of overseas experience. The development of loan securitization in the US was aided by strong laws and regulations, while in China there are few rules governing such products. The US market was also helped by local emphasis on business, accounting and supervisory transparency - all areas where China still has room to improve.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn