Car financing a new bright spot in Chinese economy

Outstanding car loans climbed to 670 billion yuan last year from 5 billion yuan in 2005 as mainlanders switch to spending over saving

PUBLISHED : Tuesday, 04 October, 2016, 5:57pm
UPDATED : Tuesday, 04 October, 2016, 11:38pm

Buying a new car by taking out a loan has become increasingly popular with mainlanders and is likely to provide a catalyst for shifting the Chinese economy towards a growth model based on consumer spending.

A quarter of Chinese car buyers have borrowed money to finance their purchases, and the percentage is set to top 30 per cent soon, according to vehicle information website Autohome.

Chen Junjie, 35, a clerk with a state-owned company in Shanghai, said a car loan would enable him to get his hands on his dream car - a Mazda Atenza - much earlier than he would otherwise be able to.

“Paying several thousands of yuan to drive my own car one or two years ahead of schedule is not a bad choice,” he said. “We are in a new era when people are inclined towards spending, not saving.”

We are in a new era when people are inclined towards spending, not saving
Chen Junjie, motorist, Shanghai

The vehicle loan market has grown exponentially in China during the past decade. The outstanding amount jumped to 670 billion yuan last year, compared to 5 billion yuan in 2005, consultancy Forward Business and Intelligence said in a report.

The penetration of auto financing in China is still lagging far behind developed markets such as the United States where about 70 per cent of car buyers use loans to finance their purchases.

Chinese people used to save cash for years before buying a car.

It was not until 2014 that a soaring number of mainlanders, particularly those aged between 20 and 40, started to use auto financing services to buy a car. Vehicle ownership is seen as a symbol of luxury and success in the country.

Chen, who earns 10,000 yuan a month, plans to borrow 80,000 yuan to buy an Atenza that carries a price tag of about 200,000 yuan.

“After spending 90,000 yuan to buy an auto plate in Shanghai, I am a bit short of cash, but I can easily repay the loans in two years,” he said. “I believe it’s the right choice to take out a loan to fulfil my dream of owning a car.

“The interest rate of five to eight per cent is affordable to people like me. Lending money to us is definitely a good business because we borrow the money to buy things, not bet on stocks.”

Car buyers in China now have access to loans from banks, auto financing firms and online peer-to-peer (P2P) lending platforms.

Global auto giants including General Motors, Volkswagen and Ford are trying to capitalise on auto financing demand in China by expanding their car loan businesses in the world’s second-largest economy.

It’s inevitable that some loan defaults occur, but the bad-loan ratio seems controllable
Steve Shi, a manager with Juchen Auto Trade

P2P lending platforms have also seen business from auto loans surge in the past three years.

“P2P charges a higher interest rate, but it offers an alternative to banks and auto financing firms because some of the buyers are unable to secure a loan from those institutions,” said Steve Shi, a manager with Juchen Auto Trade, an auto service firm. “It’s inevitable that some loan defaults occur, but the bad-loan ratio seems controllable.”

China has more than 20 auto financing companies with a total capital base of 400 billion yuan. They had issued about 4 billion yuan of asset-backed securities (ABS) products backed by auto loans as of June, a move designed to hedge against defaults while raising fresh funds for further business expansion.

ABS allows the financing firms to sell off their loans to other investors while freeing up more money that can be lent to new customers.

According to Fitch Ratings, the average cumulative default rate for Chinese auto ABS was below 1.5 per cent at the end of June, 2016.

“Overall, the performance of auto-loan ABS hasn’t seen major deterioration despite slowing economic growth,” Fitch said in a research report.

Fitch expects delinquency rates will edge up as economic growth is expected to drop to 6.5 per cent this year, the slowest pace since 1990.