SHANGHAI -- General Motors won final approval on Thursday to begin operating China's first auto financing company, beating foreign rivals who are queuing to enter the largely untapped market.
Fewer than 20 percent of new cars sold in China are financed, with large state banks dominating the market, but auto makers are hoping car financing will fuel the next stage of explosive growth in the country even as car sales slow.
GM, the world's top auto maker, expects that in 10 years up to half of all Chinese car buyers will be financing their purchases, but executives have said the industry still needs a national credit rating system and procedures for reclaiming cars that are defaulted on.
GM said it did not know exactly when the venture would formally start offering loans to consumers.
"I think it will be safe to say in the next couple of months," said spokeswoman Daphne Zheng. "Some of the next steps will be administrative. It might be very quick, or it might take some time. This is really in the hands of the government."
China has no central credit rating agency, no laws to repossess cars from errant borrowers, and -- after just a few years -- a swelling pool of non-performing auto loans.
Analysts said these uncertainties mean providing credit would not necessarily translate into an immediate sales fillip.
"It's still very difficult to check people's credit and there's no easy answer to this problem," said Yale Zhang at auto consultants CSM. "The auto loan market is still very small, it's going to take time to develop."
Growth in China's car sales is expected to slow to just 20 percent this year after sales nearly doubled to 2 million units in 2003. Industry-wide sales slowed in June for the third month in a row as Beijing clamps down on credit to curb soaraway economic growth.
Still, auto financing has proven to be a big money spinner for GM in more developed markets in the United States and Europe.
Its financing unit, General Motors Acceptance Corp., earned a record $860 million in the second quarter to June, up from $834 million previously, accounting for about 64 percent of GM's total earnings.
The new finance company, a joint venture between the finance units of GM and long-time Chinese partner Shanghai Automotive Industry Corp., will have 500 million yuan ($60.4 million) in registered capital, an official with the China Banking Regulatory Commission's Shanghai branch told Reuters.
GM's finance arm will contribute 300 million yuan, with the rest coming from the Chinese partner, the regulator said in a statement.
"In recent years, car ownership has increased, and this means there is great need for auto financing services," it added.
Rules allowing non-bank institutions to set up car financing were issued last October by Beijing, fulfilling World Trade Organisation pledges more than a year late.
Chinese banks have only been offering the service since 1998, but the service was rapidly scaled back after an explosion in bad car loans.
Volkswagen AG, Ford Motor Co. and Toyota Motor Corp. already have initial approval to enter the Chinese auto loan arena.
They, together with other foreign automakers, plan to spend some $13 billion tripling production capacity in China to 6 million cars a year by the end of the decade, prompting fears of a margin-sapping glut.
But China's market is still expected to become the world's second largest, after the U.S., by 2010, according to consultants McKinsey