FEATURE: Loan problems inhibit growth of Chinese car market

BEIJING, June 8 Kyodo

It's hard to get a loan to buy a car these days in Guiyang.

A few major state-owned commercial banks in the Guizhou provincial capital were forced to largely reduce the number of loans they grant for the purchase of motor vehicles due to the high percentage of borrowers defaulting, according to Xinhua News Agency.

Under Chinese law, banks can only begin moves to collect outstanding amounts if a borrower has not paid back the principal and interest three months after the date of a loan's maturation.

Before the Chinese New Year in January, the Guizhou branch of the Industrial and Commercial Bank of China used legal channels to collect payment from dozens of debtors. However, past-due loans have continued to pile up ever since.

As a result, all but one of the bank's branches in Guizhou that previously offered auto loans have stopped the service, and the sole survivor screens all applicants. The only branch of the Construction Bank of China in Guizhou that offered car loans has also stopped.

No official figures are available for the rest of the country, but banking sources suggest the Guizhou problem is not unique.

As to why this should be, they suggest the main problem is that car ownership is now very much a fad and a lot of people have been lured by cheap credit into buying a vehicle they can't afford.

Taking out a loan in China is always a headache, but a recent survey suggests 35% of people in the market to buy a car would not even consider using credit.

Most of the people who said they would be willing to consider a loan still described bank terms as unsuitable. Of those in the unwilling category, 31.3% thought the down payments were so high they might as well pay full price. In addition, 64% thought the terms of loans for medium-sized sedans were too short -- only three years -- and the monthly payments and interest rates too high.

A total of 65.5% thought the loan procedures were too complicated. And 68% said they abandoned car purchases midstream because they could not find guarantors required by the banks.

Some experts have suggested interest rates should be lowered and loan procedures simplified, but the experiences in Guizhou suggest banks might not find the argument convincing.

At the same time, there are suggestions government policies are largely to blame, not banking procedures.

With the focus of the auto market switching increasingly to cheaper compact models, on the surface it appears that cars are becoming more affordable to a broader range of Chinese consumers.

Prices will drop further when China joins the World Trade Organization (WTO) and has to cut its tariffs on auto imports from 70% to 80% to 25% by mid-2006.

Yet, despite a 32% increase in sales during the first quarter of this year over the same period in 2000, industry insiders insist cars may still remain out of reach for many consumers unless the government lifts the levies that have kept prices among the highest in the world and stunted the growth of the domestic industry.

Although automakers have made numerous small price cuts in recent years, these have done little to stimulate the market. A Honda Accord rolling off the assembly line of Guangzhou Honda right now is priced at more than 360,000 yuan ($43,000). A similar model costs about $23,000 in the U.S., where average wages are far higher.

Manufacturers feel they are victims of government policies, such as the 3% to 8% consumption tax and a 10% car purchase tax that has to go on top of the factory gate price.

These taxes have seriously dampened consumers' enthusiasm and depressed the market; as a result, say the manufacturers, they have been unable to expand production significantly or cut prices.

According to Zhong Yongjiang, vice president of First Automotive Works Volkswagen: ''We must maintain a high profit margin to get enough money for product development because of an inert market.''

Domestic production capacity exceeds 1.4 million cars a year, but annual sales linger between 600,000 and 700,000 units, less than half the yearly output of a medium-sized international carmaker.

The problems created by nationally imposed taxes are compounded by local arbitrary charges averaging 15% to 40% of the price of a car. In Wenzhou, Zhejiang Province, for example, local taxes and fees nearly double the price of a vehicle.

According to the China Institute of Auto Economic and Technical Information, in 1999 the taxes and fees imposed by central and local governments exceeded 160 billion yuan, compared with profits of less than 5.8 billion yuan for all domestic automakers.

Chinese carmakers acknowledge that competing in the international market will be impossible if prices remain high after the country joins the WTO. But they believe they need to drop prices step-by-step rather than overnight to ensure funds are available to develop new models.

To stimulate the market further, Li Jingsheng, the auto institute director, urged the government to reduce the burdens on consumers. He called for policies that would encourage private car buying and create a favorable environment for the market.

This did not mean the government should force carmakers to cut prices, but the companies should be able to decide prices for themselves in a market-driven economy.

His call was echoed by Jia Xinguang from the China National Automobile Consulting and Development Corp., who suggested taxes should be lowered and all arbitrary fees on consumers removed to encourage car buying.

Li Anding, a senior auto analyst from Xinhua, said: ''Chinese families cannot be deprived of the right to enjoy modern mobility, and the government has a responsibility to help them realize their dreams.''

COPYRIGHT 2001 Kyodo News International, Inc.
COPYRIGHT 2001 Gale Group

Bibliography for "FEATURE: Loan problems inhibit growth of Chinese car market"

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"FEATURE: Loan problems inhibit growth of Chinese car market". Asian Economic News. June 11, 2001. FindArticles.com. 16 Jun. 2008. http://findarticles.com/p/articles/mi_m0WDP/is_2001_June_11/ai_75504618