The Price of a Loan

A month back I posted over a piece from Frans Tuinstra about the difficult problem of enforcing a car loan in China. Now it seems some 'Gweilos' are about to try their hand. Obviously this kind of infrastructural evolution is central to the development of the internal consumer market in China.

Beijing has published its long-awaited rules for car finance companies, removing one of the last barriers for foreign groups to establish institutions in China to lend money to buyers. The regulations, which China had agreed to issue under its accession to the World Trade Organisation, will add further momentum to the saloon market. Sales had grown by about 80 per cent year-on-year in the seven months to July.

General Motors, Volkswagen and Ford have made preparations to start car finance businesses in China and will now be able to apply for licences. Although foreign multinationals have complained about the time taken to release the rules, their publication at the weekend, by the Central Banking Regulatory Commission (CBRC), comes earlier than many had expected. Michael Dunne, of Automotive Resources Asia, a car consultancy, said the release may have been accelerated by government concern about the ability of Chinese banks to manage the rapid growth in credit for cars. Car finance is monopolised by Chinese banks.

"It may be that they want the more professional approach of foreigners in the market," said Mr Dunne. The volume of car loans increased by 286 times between 1998 and 2002, according to the CBRC, but they still account for only 20 per cent of auto sales, compared with 70 per cent in mature markets. This year, loans have accounted for up to 40 per cent of purchases, according to Mr Dunne, as Chinese banks have sought to increase their exposure to the booming car sector. The tide of new loans has been matched by a large rise in defaults, prompting some Chinese insurers to stop underwriting the banks' car loans.

In a country that has only recently begun gathering information for a national system of credit checks, the banks still know little about the people they are lending money to. Foreign institutions, with this in mind, are likely to be cautious about lending, which could limit the immediate impact on car sales. China's strict controls on interest rates also make it difficult to develop the business rapidly. The regulations issued by the CBRC will allow only large local and foreign businesses to enter auto financing, as they include a requirement for any new entrant to have at least Rmb4bn (?417m) in assets. The finance company itself will have to have paid-in capital of Rmb500m.
Source: Financial Times
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