Car Financing in China

China and its economy Capital : Beijing Population : 1. 3 billion Area : 9. 6 million sq km Currency : Yuan Ren Min Bi GNP : $4 Trillion (2001) GDP : PPP $7. 262 trillion (2004 est. ) Per Capita : $5,600 (2004 est. ) Form : People’s Republic Official Languages : Chinese (Mandarin) Growth Rate in Real GDP : 1999 7. 1% 2000 8. 0% 2001 7. 3% 2002 8. 0% 2003 8. 4% 2004 9. 1% Inflation rate (consumer prices): 4. 1% (2004 est. ) Located in South East Asia, China is home to 1.

3 billion people and constitutes 22% of the world’s population. Stringent rules of the Marxist policies, an autocratic socialist system, left China a conservative, under-developed nation for most part until refurbishment of economic and trade policies in the late 1970 and 1980 sluggish dragged a nation of China’s gigantic magnitude towards market-oriented economic development. The well known Open Door Policy introduced in 1978 began the journey of opening up China, its economy and the markets to the outside world.

Since then China has been a potential market to some of the world’s best known brands, products and services, allowing thousands of private firms to bloom, from indigenous small-town enterprises, to giant manufacturing concerns, built with foreign money. China and the World Trade Organization On December 11, 2001, China officially became the 143rd member of the World Trade Organization after 15 years of onerous negotiations to conform to WTO requirements in terms of trade and investment policies and open markets.

Largely symbolic for a country with a political history such as China, it was mainly a strategic decision made by the Chinese government to face the new revolution of economic globalization. Since the WTO entry, the Chinese government has significantly improved its functions and administrative capability. Not only that, China has begun to revise and improve the laws governing foreign trade and investments as well as consumerism in its local markets. After a year of working within the WTO framework, China had accelerated industrial restructuring, investing a total of USD 25 billion in technical innovation projects.

Accelerated growth and gdp According to Ronkainen, China’s integration into the world economy has resulted in spectacular numbers both in trade and investments. At a steady growth rate of 9. 4%, world trade has quadrupled in 1990s to USD 474 billion. With a high growth rate, both in terms of population (at 1%) and GDP (at 9%), China is a major player in the world market particularly in consumer markets. In 1996, trade totaled $246 billion ($130 billion exports plus $116 billion imports), an increase of 3% over 1995.

Exports being the key factor for its booming economic growth, China’s major exports are labour-intensive products in light industrial and textile products, mineral fuels, heavy manufactures, and agricultural goods; Asian countries accounting for almost 40% of China’s exports. China’s chief trading partners are Japan, the United States, the European Union, South Korea, and Taiwan. Major imports are machinery, steel, chemicals, miscellaneous manufactures, industrial materials, and grain.

With an abundant wealth of land and labour, foreign investment alone accounted for 42% of the GDP, becoming the largest receiver of FDI in the world after the US. Tariff levels China, a large market of 1. 3 billion consumers has always been tempting commercial players from the Europe and Americas, not only to just be able to sell their products in the huge Chinese market but also to be able to use its wealth of abundant resources such as land and cheap labor to manufacture to meet Chinese demands as well as for exports into other Asian economies.

Of the many key factors playing a pivotal role in the ability of foreign makers to sell foreign or imported products, tariffs and taxes imposed by the Chinese government was a major obstacle. The symbolic and historic entry of China in the WTO in 2001 observed the significant lowering of trade tarrifs. China has been under tremendous pressure from WTO obligations reduced tariff rates from 43. 2% in 1992 to 15. 3 % in 2001 to the current 12 %. According to its WTO commitments it has to be noted that China may further reduce tariff levels to about 10% by end of 2005. Foreign Direct Investment

The Chinese government’s recognition of its two major attractions of low-cost labour and an enormous domestic market of 1. 2 billion consumers has further propelled its initiatives toward economic reform such as opening up of markets and reducing tariff levels. As a result, foreign investment has intensified. In the 1980s, foreign investors were restricted to export-oriented joint ventures with Chinese firms. In the early 1990s, they were allowed to manufacture goods for sale in the domestic Chinese market; and by the mid-1990s, the establishment of wholly foreign-owned enterprises was permitted.

China’s accession to the WTO, however, forces the government to open up the services sector as well. China’s FDI inflows are in the tune of $53. 5 billion and primarily capital-intensive, which means foreign companies are actually setting up industries in collaboration with Chinese companies to manufacture commodities at lower prices. FDI in a developing economy means the development of the entire national economy on a grand scale, benefiting several other support industries, development of the country’s infrastructure, raising standards of living and increasing per capita income.

World-leading manufacturers on PC, electronic products, telecommunication equipment, pharmaceutics, petrochemical industry, and power equipment, have expanded their production network to China. Of these, Automobile Industry receives a significant share of the annual FDI to become one of the two pillar industries in China ? the other being Real Estate. AUTOMOTIVE INDUSTRY IN CHINA Auto industry in China is one of the prime industries; it is highly interconnected with other industries.

Being a decisive factor on the growth of the economy at large and the GDP of the common Chinese man, it has a crucial impact on the whole national economy of China. Pre-WTO, production of automobiles was meant only to meet the needs of economy, national defense and official duties churning out 500,000 units of six models purchased mostly by bureaucrats. The entry of China into the WTO breathed new life into the Automobile Industry. The industry has made great progress in restructuring itself. Reorganization, joint ventures and cooperation centered around three major auto groups are some of the major changes in the Automobile Industry.

Gaining entry into the WTO has made it that much easier not only for investors to enter the local market but also for the average Chinese family to be able to purchase a car. China once levied a whopping 150 % tariff on imported cars. During its 15-year long membership application marathon, it has partially met the requirements of WTO and reduced its tariffs gradually. Now, tariffs on cars stand at 25% percent. Production and Sales According to statistics, China’s auto output exceeded one million in 1992, and 3 million in 2002. The output has surpassed 4 million units in 2004, becoming the fourth largest auto maker in the world.

By 2010, the output is expected to surpass 10 million units. Approximately 200 models are competing under various brand names in China’s explosive car market. The auto industry however has been at a higher growth rate than the GDP. Auto sales volume in China has increased by 6. 33% annually, from 1. 46 million units in 1995 to 1. 83 million units in 1999. The volume of private cars has grown by 28. 4% annually, from 2. 50 million in 1995 to 5. 34 million in 1999. With a staggering growth rate of 22. 33% growth rate (year-on-year), China’s total auto sales raked in USD 75. 594 billion with USD6. 20 billion in total profits.

Total demand for new vehicles is forecast to climb by 12 percent to 5. 6 million units this year, with sales of passenger cars rising 15 percent to 2. 6 million units. FDI and the Auto Industry The automotive industry in China has enjoyed a growth rate of over 14% (approx), attracting major foreign investment. According to Forbes, American, European and Japanese car makers not only want to tap into China’s vast auto market but they also believe that the growth of the China’s demand for cars could make up for falling profits in their own land. FDI in the auto sectors total USD20 billion at present.

Chinese laws stipulate that an individual foreign investor must partner with a Chinese company and may not own more than 50% of a Chinese manufacturer. Such laws and other financial regulations by the Chinese government coupled with abundance of production factors such as cheap labour and enormous population, some analysts have begun to speculate that in the near future China’s auto industry could resemble that of Japan or South Korea; nudged and nurtured in its foetal stages by the West and emerging as a independent and strong entity on its own with the ability to market its auto products to economies such as Europe and US by 2010.

Major Players of the Auto Industry At present there are a large number of wholly owned foreign auto companies operating with China with market leaders all having their own production plants in the country. Some of these foreign market leaders are GM, Ford, DaimlerChrysler Toyota, VW, Nissan, Renault, Peugeot, BMW, Honda and Hyundai. The three largest, the Shanghai Automotive Industry Corporation (SAIC), First Automotive Works (FAW) Group and Dongfeng Motor Corporation, each has a production capacity of around 200,000 vehicles per year.

According to China’s Automobile Industry Development Policy issued on June 1, 2004, the country encourages merger and recapitalization among automobile enterprises. Dongfeng Nissan has acquired Zhengzhou Nissan, Chang’an teamed up with Jiangling, and Hainan Mazda has been put under the banner of the First Automobile Works Corp (FAW). More mergers and acquisitions of this kind are expected to take place in the automobile sector this year . CAR FINANCING

Car financing, started in China in 1998 by domestic banks, is a young business in a market where as many as 85% of buyers still pay in cash. Auto Loans is effectively the only way for the average Chinese family to buy or own a car. Cars, at an average cost of USD15,000, are quite expensive mostly due to high tariffs and much higher exchange tickets for cars than their equivalents in the producing country or the west. Though most people depend on savings to pay for new cars, auto loans account for approximately 20% of all new vehicle sales.

To further aid the growth of the auto industry, the Chinese government established a pilot auto-financing program in May 1996 introduced by state-owned banks in China. Government regulations The Auto Finance Industry was strictly regulated by the Chinese government such that only local banks were allowed to offer loans to individuals. Due to the protectionism laws, the auto finance industry is dominated by the four largest state banks The Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), the Agricultural Bank of China (ABC) and the Bank of China (BoC).

Known as the Big Four, these banks have been authorized by the People’s Bank of China (PBOC) to start schemes in auto financing that enable the average consumer to purchase cars. The China Banking Regulatory Commission is responsible for the regulation of auto finance companies. Even today, despite WTO obligations and liberalization of the industry, government rules have unbelievable stipulations on the establishment, administration and daily operations of non-banking financial institutions offering loans (annexure 1).

Amidst several rules governing the private car-financing business, the new entrants must maintain a registered capital of USD35mn, minimum assets worth USD480mn and prove an annual income of at least USD235mn; restricting the market entry only to the biggest auto manufacturers globally. Despite such rules, major market players such as GM, Toyota and Volkswagen have either set-up or expressed a keen interest to enter into join-ventures with local Chinese companies. GROWTH OF THE INDUSTRY & CURRENT TRENDS The Auto Industry has been enjoying a growth rate of 23% year on year.

Although the auto financing industry has not been in tandem with the growing Automobile industry, it has been developing significantly. In 2002, the total balance in auto loans reached USD 13. 89bn. As of July 2003, auto loans from the four major state owned banks totaled USD16. 9bn constituting 95% of China’s auto financing market to rise further to a total of USD22. 14bn in 2004 accounting for 10. 2% of all loans for consumption among all financial institutions. The Big Four owns 80% of the auto-finance market share .

Although these numbers have increased more than 200 times since 1998, due to protectionism and a lack of legislation the Chinese auto finance market had remained highly exclusive an impassable for foreign players. Following China’s 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. Globally, 70% of new car sales are realized through auto finance, while in China this figure is only 15%.

In China, where cash is still king, cars purchased on loans or financing are gradually decreasing against the increase of total auto sales. According to statistics 40% of auto sales in 2003 were purchased on credit. This percentage decreased to a further 20% in early 2004 and went down lower to 10% by August 2004 . A possible reason for this downward trend could be the long bureaucratic procedures that individual have to go through in order to obtain a loan. In China, one has to go through at least seven different organizations to take out an auto loan from a bank.

Add to that the CBRC demand that the individual should deposit a value equivalent to the amount being lent. A down side to this downward trend in auto financing loans has been that car sales stagnated in late 2004 despite growing efforts by the government and auto manufacturers to boost auto sales. Toward the end of this irksome journey for foreign based investors to enter the auto financing industry, the ultimate beneficiaries of market liberalization will be consumers. With the establishment of AFCs, auto consumers will be offered an attractive alternative to auto loans from Chinese banks.

Since automobiles are movables, auto loans are considered highly risky. Recent statistics show that 30% of auto loans in China are bad loans. To protect themselves against such risk, state banks have imposed stringent requirements on auto loan applicants. Since AFCs are specialized financial institutions, they will have a much more effective mechanism to minimize such risk. Many auto consumers anticipate that the AFCs will introduce simplified application procedures and waive the various guarantee and insurance requirements imposed by the banks.

AUTO FINANCING COMPANIES AFCs are non-bank financial legal entities chartered and regulated by the CBRC that provide loans for auto buyers and dealers in mainland China. Mostly AFCs are set-up in affiliation with a large or foreign automobile manufacturer and as such unlike banking institutions, AFCs will not set their focus on earning interest from auto loans. The main objective of an AFC will be to boost the sales for its affiliated auto manufacturer.

Thus the new AFCs are likely to offer consumers not only lower interest rates but also comprehensive package deals in collaboration with the auto manufacturer’s repair and maintenance services. GMAC-SAIC Auto Financing Co. is the first non? banking auto financing firm on Chinese soil. A collaboration between US based General Motors Acceptance Corporation(GMAC), and Shanghai Automotive Industry Corporation, it started operations in Shanghai on August 18, 2004 becoming the first auto-loan firm to receive the go-ahead from the China Banking Regulatory Commission to start lending.

Based in Shanghai, GMAC-SAIC has a registered capital USD60. 39mn, of which USD36. 23mn has been invested by GMAC and the rest by SAIC. Entry into the Chinese auto financing industry is significant to GMAC as it hopes to increase the auto sales in mainland China. Being the first major market player enables GMAC to take advantage of demand for auto finance as consumers face difficulty securing bank loans after Beijing instituted various credit-tightening steps from late last year to rein in China’s rapid economic growth. In the U. S.

, General Motors earns more from its auto-finance arm than its automotive division but due to several cultural, political and financial issues especially those of bad debts GM will continue to expand in China, albeit, cautiously. Despite obstacle of policitical regulations and sluggish auto sales, GM showed a 19% growth in its second quarter profit of US$148 million. A partnership with Shenzhen Development Bank and Bank of China in October 2004, GMAC-SAIC Automotive Finance Co. , Ltd. has extended its business to 50 cities in China .

Speculations are ripe that in in ten years as much as half of all Chinese car buyers will make their purchases using financing options. With its expertise in the business and its close relationship with its dealers, GM believes that it will be able to compete successfully against the state owned banks . Two weeks after GM_SAIC opened its auto financing company in Shanghai, Volkswagen Auto-Financing (China) Co. , Ltd. announced that China Banking Regulation Commission (CBRC), China’s top banking regulator, had approved the company to launch their business in China’s automotive finance area.

Germany-based Volkswagen Auto-Financing Service Co. , Ltd. has pumped CNY 500 million assets in its solely-owned subsidiary, Volkswagen Auto- Financing (China) Co. , Ltd. and is the first foreign-funded automotive finance company that operates business in China. For the moment, VFS has two auto loan products in China, namely standard loans and Bailong loans. Bailong loans are VFS’s knockout products. It can help consumers greatly lower the monthly installment. The interest rate of three-year Bailong loans is 6. 88%, and four-year loans is 6. 99%. The last repayment is 20% of the total auto loans at most.