Chinese consumers take credit for boom in car loans

China Yongda Automobiles Services Holdings

05/09/2016 24:00

(Repeats Sunday story with no changes) 
    * 30% of cars bought on credit in 2015, vs 18% in 2013 
-analysts 
    * Deloitte expects cars bought on finance to reach 50% by 
2020 
    * Rebound in car sales at end-2015 helped by credit push 
-analyst 
 
    By Jake Spring 
    BEIJING, Sept 4 (Reuters) - Chinese households, traditional 
savers with an aversion to debt, are rapidly warming to the idea 
of borrowing to buy a car, as automakers push financing deals to 
boost sales and margins in an increasingly competitive market. 
    Nearly 30 percent of Chinese car buyers bought on credit 
last year, up from 18 percent in 2013, according to analysts 
from Sanford C. Bernstein and Deloitte, helping a rebound in the 
car market after a sticky 2015. 
    That is welcome news to China's government, which wants 
consumers to borrow and spend more to shift its slowing economy 
away from heavy industry and investment-led growth. 
    Beijing resident Wang Danian said he planned to buy his 
first car on credit, saying it was the smart move. 
    "I can use my cash to do other things," the 28-year-old said 
while looking at an FAW  SASACJ.UL  Besturn X80 sport utility 
vehicle. "If I use all my savings at once to buy a car, and then 
something happens, I can't manage the risk." 
    Six consumers interviewed by Reuters said they would all 
consider loans, lured by low-fee and interest-free deals, with 
half saying they'd prefer to buy on credit and save cash for 
other items. 
    "I'd estimate after the manufacturer came out with the 
low-interest deal that about 30 percent of potential cash buyers 
switched to buying on credit," said a salesman at a Volkswagen 
 VOWG_p.DE  dealership in eastern China's Jiangsu province who 
gave his name as Mr. Zhao. 
    That is still a far cry from the more than 80 percent of 
cars bought on loans in the United States, but Deloitte predicts 
China will reach 50 percent by 2020. 
    Global automakers have struggled to encourage this trend for 
some time; Volkswagen established its finance subsidiary in 
2004, but was held back by strict regulations on underwriting 
loans and sources of funding. 
    As the government gradually relaxed those restrictions over 
the last seven or eight years, financed purchases have grown, 
with Daimler's  DAIGn.DE  Mercedes saying more than 30 percent 
of its cars in China are now bought on credit, and it reported 
31 percent year-on-year growth in net lending as at the end of 
July. 
    China's auto market struggled last year thanks to the 
slowest economic growth in 25 years and a stock market rout, but 
rebounded in October when the government cut sales tax on 
smaller cars. By July, vehicle sales were rising at their 
fastest monthly rate in three and a half years.  urn:newsml:reuters.com:*:nL3N1AT2DH 
    "While the government's tax reduction was the most obvious 
explanation for the rebound in Chinese car sales at the end of 
2015, soaring auto financing penetration represented another, 
lesser noticed, driver of the boom," Bernstein said in April. 
     
    DEFAULT RISKS 
    More Chinese automakers jumped into the loans market last 
year, with Guangzhou Automobile Group  601238.SS  2238.HK  and 
Geely  0175.HK  setting up financing firms. 
    Several Chinese carmakers also reported a significant impact 
from financing activity on their accounts for the first half of 
2016. 
    SAIC Motor Corp  600104.SS , China's largest automaker, said 
its net operating cash flow dropped by 16.6 billion yuan ($2.5 
billion) from the same period a year ago, as money was diverted 
to its financing unit for consumer loans. 
    Dongfeng Motor Group  0489.HK  similarly reported a 3.6 
billion yuan year-on-year fall in net cash flow due to an 
increase in loans and receivables of its financial business. 
    Great Wall Motor  601633.SS  recorded a 140 percent increase 
in interest income, mainly because of its finance subsidiary. 
    BYD  002594.SZ  1211.HK , backed by Warren Buffett's 
Berkshire Hathaway  BRKa.N , said with 13.6 percent of its sales 
done on credit, financing was already making considerable 
contribution to its profits. 
    Controlling the risk of default on these loans can be 
difficult in China, where there isn't a reliable credit rating 
system for individuals comparable to the U.S., said Yale Zhang, 
managing director of consultancy Automotive Foresight in 
Shanghai. 
    "You cannot spend one month to investigate one person and 
then in the end you only land 100,000 yuan," Zhang said. 
    That got the sector into trouble when China previously tried 
to pump up car sales through loans after the Asian financial 
crisis of the late 1990s. A lack of risk control resulted in 
widespread defaults and a government clampdown for several years 
in the mid-2000s, he said. 
    "It arguably remains open to question whether Chinese auto 
(non-performing loans) will remain similarly low, should macro 
conditions deteriorate," Bernstein said in April, observing low 
delinquency rates thus far. 
    Chinese e-commerce giant Alibaba  BABA.N , which last year 
inked a collaboration deal with China Yongda Automobiles 
Services  3669.HK , says it can address this risk thanks to 'big 
data' it has on its customers, including their credit records. 
    The company's auto web portal offers "instant automobile 
financing", approving loans in as little as 20 seconds, a 
spokeswoman said. 
 ($1 = 6.6790 Chinese yuan renminbi) 
 
 (Reporting by Jake Spring and Beijing newsroom; Editing by Will 
Waterman) 
 ((jake.spring@thomsonreuters.com; +86 10 66271032; Reuters 
Messaging: jake.spring.thomsonreuters.com@reuters.net / Twitter: 
@jakespring)) 
 
Keywords: CHINA AUTOS/LOANS