Who Can Have a Piece of the Auto Credit Pie?

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  Buying cars on credit is nothing new in the rest of the world since it has had a history of 80 years internationally. In China, however, it is just starting. As the Chinese government is loosening up controls in this field, foreign financial institutions are busy making preparation to win a piece of the auto credit pie in China. Not to be left behind, domestic financial institutions are gearing up for a battle on the marketplace. The auto credit market in China is fast entering a Warring States period.
  According to a forecast, demand for motor vehices in China will increase at an annual rate of 20-25 percent during the 2000-2005 period; and demand for private cars at 33 percent. At present, seven million households have the financial capability to buy a private car. In 2005, a whopping 42 million households will, and by then China may become the third biggest car market in the world, after the United States and Japan. At present, more than 70 percent of all households in the cities of Beijing, Guangzhou and Shanghai intend to buy a private car in the next 5-10 years.
  Since 1995, when the Shanghai Automotive Industry Corporation (SAIC), in cooperation with a financial institution, first started offering credit for auto purchases, the First Automotive Works (FAW) Group, Changan Automotive Co. and Tianjin Automotive Co. have successively established their own auto credit companies to offer loans for auto purchases. Chinese banks also began offering auto credit in October, 1998.
  But so far, less than 10 percent of all auto purchases are made on credit. In 2000, more than 100,000 auto buyers received credit services, six percent of the total. The number more than doubled in 2001. Industry officials predict that the number of people who will use credit when buying motor vehicles will shoot up in the next few years. The auto credit pie is going to be lucratively bigger.
  A rapid development of the auto credit business has hastened the lifting of a ban on auto credit business by state-owned banks. In 2000 the People‘s Bank of China, the central bank, promulgated "Guiding Principles for Individual Consumer Loans," giving the green light to the extension of auto credit by domestic banks.
  Credit availability has made a private car within reach for many Chinese. At present, about 10 percent of all new car purchases are made with credit. Compared with markets where 60-80 percent of all purchases are made with credit, China‘s auto credit market has vast room for expansion.
  This has not been lost to many multinational corporations.
  Last March, Ford, General Motors and Volkswagen, all multinational carmakers, expressed the hope that the Chinese government would promulgate methods of administration for foreign auto credit companies at an early date so that they can offer credit services to Chinese car buyers sooner.
  According to commitments it made during negotiations on its accession to the WTO, China allows non-bank financial institutions to engage in auto credit business in China and, within five years of China‘s WTO entry, foreign banks can also provide auto credit services to individual car buyers in China.
  It is reported that "Methods of Administration for Auto Financial Firms" worked out by the central bank will come out soon. The central bank will also promulgate detailed regulations on the establishment of wholly-owned or joint venture auto credit firms in China by foreign non-bank financial institutions. According to the regulations, representative offices of foreign auto credit companies can be upgraded to branch companies after half a year of preparations and offer auto credit services in China.
  Applications from Ford, GM and Volkswagen have been submitted to relevant Chinese authorities for examination and approval. GM is the first auto giant to file an application with Chinese authorities to set up an auto credit firm in China. "We intend to set up the first auto credit joint venture in China with a first-rate local financial institution," a representative of GM‘s auto credit firm, GMAC, said.
  Industry officials say the entry of foreign capital into the auto credit business in China will lead to dramatic changes to China‘s motor industry. This is because specialized auto credit firms‘ interest is not limited to making money; they try their best to help their parent companies - carmakers - sell more cars in China.
  Chinese financial institutions, feeling the imminent threat of foreign auto credit companies, have been making great efforts to win customers.
  The Shanghai branch of China Industrial and Commercial Bank has provided a cumulative 2.2 billion yuan in auto credit, which comes in more than 20 varieties, including a car-apartment combination loan and a garage-mortgage loan. To win customers, the head office of the bank has recently announced a 10% interest cut on loans for car purchases and decided to add 8 billion yuan worth of auto loans this year.
  The Agricultural Bank of China plans to extend a total of 20 billion yuan in auto credit in 2002. Streamers bearing the words "The Agricultural Bank of China helps you realize your dream of owning a car" are everywhere in big Chinese cities.
  The Bank of China, the country‘s special foreign exchange bank, ranked second last year in the amount of auto credit extended. Its goal for this year is to double the amount of auto loans it extended last year, which was 6.1 billion yuan. And it has increased loan varieties to expand business. For example, it now offers loans for used car and imported car purchases.
  The Construction Bank of China is expanding business aggressively, too. More than 400 branches of the bank have signed loan agreements with 22 carmakers for over 30 car models. It is expected to extend 10 billion yuan in consumer loans, with focus on loans for car purchases.
  Other banks, including Jiaotong Bank, Merchants Bank and Minsheng Bank, are following suit, with each having its own auto credit development plan.
  China has obviously entered the family car era. The auto credit business is expected to hasten the speed of cars entering ordinary Chinese homes and, in the process, helps the country‘s motor industry grow faster.
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