China's Car Financing Market: A Slow but Gradual Adoption

The Chinese car market has long been subject to rumors of a massive boost in car sales due to the increased availability of motor vehicle financing. However, analysts believe that credit risk and a cultural aversion to credit buying will slow this process down. Despite optimism, car financing sales have been modest since 2004, with only a handful of foreign car companies approved to provide financing. The Bank of China has formed a joint venture with Banque PSA Finance, an arm of PSA Peugeot Citroen, and Dongfeng Automobile Co. to provide financing, while Ford has started offering retail financing in several major cities.

Key Takeaways:

• Despite the growth of motor vehicle financing, car financing sales in China have been relatively modest, with only 10% of buyers using financing, compared to up to 85% in the United States and the EU.
• The non-performing ratio of car loans at commercial banks averaged 10% at the end of last year, due in part to buyers defaulting on loans because they realized their cars were worth less than what they owed.
• The biggest obstacle to the expansion of financing is the lack of a reliable credit-rating mechanism, with analysts building in an expectation of default into their policies.
• Foreign car companies such as GM, Volkswagen, and Ford are working to increase financing options for Chinese buyers, with GM hoping to access a new nationwide credit bureau introduced earlier this year.
• Mainland banks are heading back into the market with stricter requirements, such as a 20% down payment on car purchases, while other banks are planning to reduce the lending period or the maximum loan to vehicle value.
• Timothy Dunne, of Automotive Resources Asia, believes that Chinese buyers are becoming accustomed to buying on credit and that if car financing takes off it could have a huge impact on the market.

Statistics:

• Only 10% of Chinese buyers use financing, compared to up to 85% in the United States and the EU.
• The non-performing ratio of car loans at commercial banks averaged 10% at the end of last year.
• GM has only 236 GM dealerships offering retail financing in 58 cities, while Shanghai GM has 400 dealerships around China.
• Ford Automotive Finance (China) has provided financing to 60 Ford dealers with a credit line of US$100 million, primarily vehicle inventory wholesale loans.

Sources:

• "China Approving Foreign Car Finance Firms" by Shanghai Daily, December
• "Chinese Car Buyers Finding Credit Difficult to Get" by The Financial Times
• "China's car sales slump weighs on automakers' profits" by Reuters
• Standard & Poor's report, March
• Shanghai Daily newspaper, December
• Automotive Resources Asia