On August 5, 2004, General Motors obtained final approval from the China Banking Regulatory Commission CBRC to offer car loans to Chinese consumers via its joint venture GMAC-SAIC Auto Financing Co Ltd. Following GM, the wholly-owned financing companies of three other auto makers—Ford, Volkswagen and Toyota—will likely also be approved by the CBRC.
US GMAC-SAIC Auto Financing Co Ltd. has registered capital of RMB500 million (U.S.$60 million), 60 percent owned by General Motors Acceptance Corp and 40 percent held by Shanghai Automotive Industry Corp. The venture will commence business operation in Beijing and Shanghai in October. It will compete with the Agricultural Bank of China and other big Chinese state lenders for financing buyers of General Motors’ Buick, Excelle, Sail and GL8 vehicles.
General Motors anticipates that easier financing will bolster sales in a market where only two out of every ten cars are sold with loans. In the U.S., as much as 85 percent of all vehicles sold are financed by loans.
Last year, China’s car sales increased 76 percent, reaching 1.79 million units. However, growth decreased in April as customers, anticipating larger discounts, delayed purchases. Auto sales began to rebound when discounts came to an end in July.
China’s four state-owned commercial banks are responsible for more than four-fifths of China’s total outstanding auto loans. General Motors’ venture can lend as much as 90 percent of the car’s total price and total loans can reach 10 times its capital, or RMB5 billion (US$600 million), based on rules released in November 2003.
General Motors has an advantage over foreign banks such as HSBC Holding Ltd., Citigroup Inc. and Standard Chartered, which have to wait several years before they’re allowed to offer loans denominated in RMB yuan to Chinese consumers.
It was only a few years ago that Chinese banks began to grant consumer loans for financing vehicles, houses and even home appliances. Such loans were seen as helpful in improving the bank’s traditional loan structures and resulted in rapid growth. However, risk levels associated with auto loans rose unexpectedly. Many borrowers, in response to the rapid depreciation of their vehicle due to competition-driven price declines, chose to not repay their loans. In addition, because of the lack of credit system in China, deliberate defaults or obtaining auto loans through fraud and deception are common despite many measures against risks. Further, the incomplete registration system makes it very difficult for lenders to repossess vehicles. As a result, some Chinese insurance companies, including the People’s Insurance Company of China (PICC), suspended insurance for honoring auto loan contracts in many areas. As a result, auto loans have been on the decline since August; many banks began raising down-payment requirements and shortening loan terms, and some banks even suspended approvals on certain high-risk loans for auto consumers.
Experts within the industry concur that the opportunities now available to auto financing companies manifest a trend by the Chinese government of encouraged auto consumption. Some analysts postulate that domestic Chinese banks may ultimately surrender the market to foreign auto financing firms that are more experienced in dealing with auto buyers.
For more information about China’s auto loans policy and its latest development, please contact Daqin Zhang at (801) 323-5967 or by email at dzhang@kmclaw.com.