This report does not constitute a rating action.

Key Takeaways

• The findings of two scenario analyses indicate ABS and RMBS in China that we rate should be resilient to tariff risk.
• Favorable features in the transactions that we rate lead to growing credit enhancement over time, strengthening rating stability.

In response to investors' interest in the impact of tariffs on China's securitization transactions, S&P Global Ratings tested the resilience of the Chinese asset-backed securities (ABS) and residential mortgage-backed securities (RMBS) that it rates. Hypothetical scenarios include: (1) to what extent the increase in defaults is likely to lead to downgrades; and (2) increased level of gross defaults and the ensuing effect on ratings, if any.

The key finding of the scenario analysis is that favorable features in the transactions that we rate lead to growing credit enhancement over time, hence strengthening rating stability. That said, we expect the effects of tariffs to weigh on the collateral performance of the transactions that we rate amid elevated arrears due to weak macroeconomic conditions in China since late 2023.

Tariff Impacts And Macro Backdrop

• China's GDP growth should be closer to our March 2025 forecast of 4.1% for 2025 and 3.8% in 2026, compared with our recent forecast of 3.5% and 3.0% for the two years. This follows the 90-day pause on reciprocal tariffs between the U.S. and China effective May 14, 2025, considering mutual tariff reduction is a relief for exporters and the economy more broadly. This is according to "Global Credit Conditions Special Update: U.S.-China Tariff De-Escalation Brings Some Temporary Relief," published May 15, 2025.
• We expect tariff impacts to vary by asset classes in China, based largely on whether the effects are direct or more indirect in nature. Most rated ABS deals, backed by auto loans and consumer loans, and RMBS deals, would likely be indirectly impacted through macroeconomic factors. This is because the pools of borrowers underlying most of those deals are retail based and the pools are diversified given the number of obligors.

• We believe the main transmission channels for any potential deterioration in collateral performance will stem from tariff-related impact on macroeconomic factors such as rising unemployment and lower economic growth.

A Snapshot Of Rated Chinese ABS And RMBS In Scope

• Transactions in scope: We have selected 14 transactions with 15 tranches. These comprise 10 auto loan ABS, two RMBS, one equipment lease ABS, and one consumer loan ABS.
• Number of obligors: For deals backed by retail assets, there tend to be tens of thousands of obligors in the underlying pools. In our view, most of these obligors are prime borrowers. Even for the selected equipment lease ABS transaction, there are more than a thousand obligors in the underlying pool, which we think reflects granularity in this sector, unlike some other equipment lease ABS transactions.
• Pool factors: Current outstanding pool balances for most of the transactions range from 30%-100% of the initial pool balance.
• Collateral performance: Most of the transactions exhibit cumulative default rates in the initial pool balance of lower than 1%. For the most part, asset performance has been either in line with our expectation or stronger than we anticipated so far, although performance has weakened slightly in the past few quarters compared with 2023 and before.

Transaction Characteristics

• Note amortization: Most rated transactions are amortizing, while some are still in the revolving period.
• Payment structure: Most selected transactions adopt a sequential pass-through structure. During the amortization period, principal collections are used to pay down senior tranches until full repayment before repaying junior tranches. A small portion of transactions repay senior notes first and some of principal collections may be used to repay junior tranches before senior notes are fully repaid if the target credit enhancement condition is met.
• Excess spread: Most of the transactions in scope use excess spreads (if any) to expedite payments of note principal. Certain transactions are structured to use excess spread to purchase new assets during the revolving period. In this case, overcollateralization increases after deal close despite the revolving period and without note amortization.
• Tranches in scope are the senior most and rated 'AAA', except a mezzanine transaction rated 'A'. In contrast with other regions, most of the China securitization transactions we assess are rated 'AAA' and do not have speculative-grade ratings on tranches.

Scenario 1

Assumptions

• We estimate the maximum stress default rate (breakeven default rate or BDR) that each tranche can withstand based upon the latest information available and the cash flow modelling of each transaction.
• For the ABS in scope, we use BDR and rating stress multiples based upon our relevant criteria and surveillance precedents to derive a hypothetical base-case default rate.
• We compare the rate with the initial base-case default rate at transaction close. In other words, if data and analysis warrant the rating committee deciding to increase our base-case default assumption over the hypothetical level, it would lead to the failure of cash flow testing at the current rating level.
• We then compare our initial base-case default rates applied at closing against actual collateral performance for each transaction to measure the level of additional performance deterioration that might be acceptable without revising the initial base-case default rates.

Findings

• For most ABS (except two newly closed transactions), no negative rating action will be taken if our base-case default rate assumption increases by 1x of our initial assumption. Only if drastic and lasting deterioration of the collateral performance were to warrant the increase of our base-case default rate assumption by more than 1x-5x of our initial assumption would it lead to negative rating actions. Our base-case default rate assumptions for the transactions in scope range from 0.8%-2.5%.
• Moreover, the actual collateral performance we have observed is mostly either in line with or better than our initial base-case default assumptions at closing. This serves as another cushion before we consider adjusting the assumptions.
• The two newly closed ABS transactions are more susceptible to external stress than seasoned transactions because additional credit enhancement through note amortization is yet to build up. Like other seasoned transactions, the resilience of the two new transactions should strengthen over time due to their sequential pass-through structure.
• For the two RMBS in scope, the BDRs are high, reflecting about five years of seasoning and the increase of credit enhancement as the notes amortize. We expect strong rating resilience of these two RMBS even in times of stress given high overcollateralization and higher recovery rates than most ABS asset types.

Scenario 2

Analysis And Findings

• We assume the hypothetical base-case default rate to be 0.25x higher than the base-case default rate assumption in new rating assignments.
• For the 13 ABS tranches, 11 would not face downgrades. For the remaining two tranches from the two newly closed deals, we would lower the ratings by two notches. The same sensitivity analysis can be found in the respective new issuance rating reports.
• The two RMBS tranches demonstrate significant rating stability given their long seasoning and high overcollateralization as a result of note amortization over time, and higher recovery rate compared with ABS.

Some Limitations And Caveats To Our Scenario Analysis

It's worth highlighting a few caveats to our scenario analysis:

• The transactions in scope are a small portfolio sponsored by top-tier originators that lend to prime borrowers. As a result, the scenario analysis and findings may not be suitable for making inferences about the entire securitization market in China.
• The stresses we selected for each scenario are hypothetical and are not meant to be predictive or part of any outlook statement.
• In our scenario analysis, we applied increases in gross defaults immediately, which is a conservative assumption. An actual future increase in defaults is likely to occur gradually, during which time the ABS and RMBS tranches are likely to build up credit enhancement, potentially lessening the ratings impact.
• Our analysis does not consider any additional credit enhancement build-up since the last surveillance analysis of each transaction in scope.
• The stresses are also not intended to correspond with any of the economic scenarios we associate with our ratings in our ratings definitions.
• We base the results on the application of the models we use to rate these transactions. A rating committee applying the full breadth of S&P Global Ratings' criteria, including qualitative factors, and a forward-looking view might, in certain instances, assign a different rating than the quantitative analysis alone would indicate.

How We May Factor In Tariff Risk In Future New Ratings

• Historical performance to be received in the next few months is unlikely to fully reflect the potential impact of tariffs. To address this issue, we'll place a strong emphasis in our operational review meetings with the originators on developing a deep understanding of the potential direct and indirect effects of tariffs on the originator's business strategy, obligor profile, underwriting policy, and performance trend of the managed portfolio.
• Vulnerability to tariff risk also varies by deal structure. For example, transactions that start to amortize right after deal close would build up additional credit enhancement faster than transactions with revolving periods. The former would be more resilient than the latter from a rating perspective.

Related Research

• Global Credit Conditions Special Update: U.S.-China Tariff De-Escalation Brings Some Temporary Relief, May 15, 2025
• Scenario Analysis: Private Credit Is Insulated But Not Immune From Tariff Risk, May 9, 2025
• Global Macro Update: Seismic Shift In U.S. Trade Policy Will Slow World Growth, May 1, 2025
• China Securitization Performance Watch 1Q 2025: Tariff Impact Looms Despite Robust Issuance, May 13, 2025
• Tariff Impacts Will Vary By Sector In U.S. Structured Finance, April 17, 2025

Primary Contact:	Yalan Tao, Hong Kong 852-2532-8033; yalan.tao@spglobal.com
Secondary Contacts:	Jerry Fang, Hong Kong 852-2533-3518; jerry.fang@spglobal.com
	Annie Wu, Taipei 886-2-21756835; annie.wu@spglobal.com
	Melanie Tsui, Hong Kong 852-2532-8087; melanie.tsui@spglobal.com
	Carol Hu, Hong Kong 852-2912-3066; carol.hu@spglobal.com