More mainland institutions will be allowed to offer finance under draft rules expected to further spur sales China's central bank has published draft rules governing vehicle loans that could further spur sales in the already fast-growing sector, by greatly expanding the number of financial institutions allowed to extend credit to car buyers. Under the rules posted by the People's Bank of China on its website, non-bank financial firms including local banks, credit co-operatives and finance companies will be allowed to make car loans to consumers - a business reserved until recently for the country's Big Four state banks. Last month the China Banking Regulatory Commission gave General Motors, Volkswagen and Toyota approval to start their own car financing businesses. The new draft rules also soften the previous five-year limit on car loans, allowing a one-time extension for up to half the loan period. The People's Bank also said lenders could set interest rates, but within the confines of its overall interest rate policy. Analysts said the rules were likely to encourage more Chinese to buy cars. 'In every other major market, car financing is an important marketing tool,' said Chris Richter, a car industry analyst with HSBC in Tokyo. 'If you can walk into a dealer and get a loan, it helps release demand.' At this stage, car financing plays a small role in China, accounting for only about 20 per cent of purchases compared with an average 80 per cent in the west. However, there was still more than US$4 billion in outstanding car loans in the first half of last year, a number that is likely to have increased in the second half. Booming car sales are providing a new market for lenders. Over the first 11 months of last year, sales on the mainland rose 68 per cent to 1.83 million, driven by a doubling in sales of minivans and a healthy 50 per cent gain in car sales, according to Automotive Resources Asia, an independent research group. Apart from the impact of the new loan policy on consumers, car sales are one of the five sectors underlying China's rapid economic growth 'The government has been promoting the [car] sector as a key growth driver,' said UBS vehicle analyst Henry Wu in a recent report. Recent legislation 'contains preferential policies to promote consumer purchases'. Mr Wu said overcapacity would occur in the industry, but not across the board. Already, some Japanese producers were gaining market share in China at the expense of European companies. As a result of the fast rate of growth in the car and other sectors, UBS regional economist Jonathan Anderson concluded 'there are clear worries about the pace of investment and sectoral overheating'. While Mr Anderson remains bullish on China's long-term economic prospects, he expects a 'cooling off' period in the near future. The car industry was also cited by JP Morgan China economist Joan Zheng as one of the sectors most likely to be hurt by excess capacity. While acknowledging that overheating had not hit all sectors of the economy, she said additional capacity meant 'companies in sectors such as autos cannot sustain [their] current level of exceptional profitability'.
