Car Financing in China

GM's General Motors Acceptance Corp., which has a joint venture with Shanghai Automotive Industry Corp., was the first foreign automaker to seek and receive approval for handling vehicle financing in China.

China strictly controls auto loans, requiring that lenders' guaranteed loans not exceed 200 percent of their registered capital and staff have work experience or an education in finance.

Executive Summary:

Auto financing loans are effectively the only way for Chinese consumers to purchase cars, unless they have significant savings or can call on family money. They have been available in China since a pilot auto-financing programme was established by state-owned banks in China in May 1996.

In October 1998, the PeopleЎЇs Bank of China (PBOC) authorised the four largest state banks to undertake auto financing: The Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), the Agricultural Bank of China (ABC) and the Bank of China (BoC) started schemes. Since 1999 they have been joined by other local commercial banks including the Shanghai Pudong Development Bank. However, under this plan, individual purchasers have to leave the full purchase price of a car on deposit in a bank while paying off the auto loan.

At present only commercial banks in China are allowed to do car financing schemes under strict regulations issued by the central bank of China, the PeopleЎЇs Bank of China.

Additional problem remain determining credit worthiness, the inability to fluctuate interest rates for car loans and the lack of ownership certificates.

Following ChinaЎЇs entry into the WTO the market should become more liberalised with additional encouragements for the banks to enter the field as well as the establishment of car manufacturer financing agreements.

Despite this many Chinese consumers still claim that they do not want to enter into auto financing deals and prefer to save their cash until they have enough money to purchase the vehicle outright.

Whether or not a desire for auto financing is growing among consumers in China, it remains highly restricted and regulated. However, as part of the World Trade Organisation (WTO) accords signed in November 1999 foreign auto financing in China is part of the wider trade agreement meaning that Chinese consumers will potentially be able to utilise similar financing options to those seen in Europe and America at present - that is to say a mixture of financing through banks, car manufacturers and other financial services providers.

WTO means that, apart from the Chinese banks already providing auto financing, within five years of ratification both foreign banks and car manufacturer credit institutions will also be allowed to offer auto loans to Chinese consumers.

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At present, less than 20 per cent of cars in China are sold with loans, compared with around 70 per cent in developed countries.

Car financing generates 60 to 70 per cent of the total profits of foreign auto giants, such as General Motors and Ford.

Auto insurance accounts for more than 60 per cent of all property insurance premiums in China.

Non-bank auto financing companies must also have capital adequacy ratios of 10 per cent, which is stricter than the 8 per cent requirement on commercial banks, according to the commission's regulations.

Total outstanding guaranteed loans must not exceed 200 per cent of auto financing companies' registered capital, nor can they offer preferential treatment to related parties.

PSA Peugeot Citroen's car manufacturing joint venture with Dongfeng Motor Corp is producing the Citroen Fukang, Elysee, Picasso and Xsara models, and the Peugeot 307 which was launched last month.

The joint venture, based in Wuhan, the capital of Central China's Hubei Province, plans to sell 150,000 cars this year, up from 100,000 units last year. It also aims to increase sales to 300,000 cars before 2007.

The joint venture plans to introduce a new Citroen or Peugeot model every year from 2004 to 2009.

Sales of China-made vehicles grew by 28.6 per cent year-on-year to almost 1.78 million units during the first four months of this year, including 787,200 passenger cars.

Regulation on Personal Car Financing to Spur Market

China's top banking regulators are likely to shore up control over the heated commercial lending market by tightening their grip on