SHANGHAI -- Shanghai's streets are clogged with foreign-nameplate cars, but General Motors and its overseas rivals remain frustrated in their efforts to provide loans to China's mushrooming army of drivers.
"We had certainly hoped and expected that by the end of last year that we could have been operational," said Scott Reno, director of GM China Group's financial services department.
China's car industry is booming, with most cars in the mainland paid for in cash. Consumer finance -- credit cards and loans for cars and school -- is a nascent but growing business in China, a trend banks and finance companies hope to accelerate.
"It's still relatively new. It was only October '98 when the 'big four' state banks could start doing auto financing," Reno said in an interview on Thursday.
But gaining the right under China's World Trade Organization (WTO) membership to finance cars -- a huge business globally -- is only the beginning in a country with mostly low incomes, no central credit rating bureau, and a cultural aversion to debt.
What's more, interest rates in China are tightly regulated, and the country lacks a nationwide means to register a lien on a car, making repossession tough when a buyer defaults.
State-set interest rates for car loans are roughly just over five percent, and lenders can adjust the rates by just 10 percent or about 50 basis points, Reno said.
"I fully expect there will be a liberalization ... there will be a widening of the available margin," Reno said.
In the United States, lenders use a scoring system based on a borrower's credit record. For someone with little or bad credit, interest rates there can exceed 18 or 20 percent, Reno said.
IN SEARCH OF COLLATERAL
Securing a car loan is another challenge in China.
"You can't register a lien on the vehicle in all parts of China. So you can't take the vehicle as security," Reno said.
In some cities such as Guangzhou, buyers who finance their cars also often must buy credit risk insurance.
"I wouldn't view that as a long-term solution," said Reno.
Reno said that when GM enters the China financing market it will use measures including third-party guarantors, such as a borrower's employer, as protection.
"We won't do unsecured loans," said Reno, a 10-year veteran of the U.S. giant who has spent the past four years in China, where GM's ventures sold 264,101 vehicles in 2002, an increase of more than 300 percent from the previous year.
Relaxing financing rules is crucial to maintaining the furious growth of China's car market, Reno said. "Ultimately you do get to the point where there may not be any more cash customers ... and at that point the only way they're going to continue to grow at the same pace is if you have an easy, attractive, financing package in place," he said.
CASH STILL KING AT THE CAR LOT
China's car market is booming, with passenger vehicle sales rising 56 percent in 2002 to crack the million-unit mark.
But just 15 to 20 percent of cars sold by Shanghai General Motors are financed. By comparison, that figure is roughly 85 percent for GM cars in the United States, 70-80 percent in the UK and Germany and 60-65 percent in Taiwan, Reno said.
In China, expansion of the car finance sector depends on regulatory developments, Reno said. "In five years it could jump up to 50 percent, but if it remains a less than ideal market it could maybe grow, maybe, to 25 percent," Reno said.
Under commitments made on joining the WTO, Beijing agreed to let foreign non-bank financing companies make car loans in China, although such regulations have not yet been implemented.
"We are surprised that it has taken this long," Reno said.
GM and the financing arms of rivals Ford Motor Co. and Volkswagen AG have met jointly with the central bank to air their positions, Reno said.
Even though there is no limit on foreign ownership of such businesses, GM will enter the financing business in China in partnership with a local firm that Reno declined to identify.
Industry sources have said the tie-up will be with Shanghai Automotive Industry Corp, GM's main carmaking partner in China.