INTERVIEW General Motors to offer China auto loans by end-H1; bracing for risk

AFX News Limited

David Wilder

January 9, 2004

SHANGHAI (AFX-ASIA) - General Motors Corp said it expects its auto financing arm, General Motors Acceptance Corp (GMAC), to offer auto loans in China by the end of the second quarter, with the company bracing for the risks of operating in a market with limited auto credit data and restrictive regulation.

GM China, along with joint venture partner Shanghai Automotive Industry Corp, is currently putting together the paperwork for approval to enter the market after the China Banking Regulatory Commission finally opened the way for foreign companies to offer auto loans at the end of last year.

After a two-year delay, the regulations clear the way for foreign auto finance companies to extend car loan financing to the growing army of Chinese consumers, especially in major cities such as Beijing and Shanghai, where a car is becoming a standard household item.

But the auto giants are also entering an area where information is scarce, and which is swamped with reports of high rates of bad credit and fraud. State media reported last year that insurance companies have pulled out of the auto sector en masse because of the amount of bad credit auto loans going sour.

"It is a problem, and you shouldn't underestimate it," said Christian Weidemann, director of auto financing at GM China. "But our experience from other emerging countries is that if you have the proper purchase policy, you can minimize, if never eliminate, bad credit risk."

Weidemann would not disclose the details of the credit check system that GMAC will employ, and said it was too early to give an idea of the expected default rate.

But with car sales rising around 70 pct last year, after growing at 55 pct in 2002, and with only 20 pct of these currently financed, he also said that the potential rewards outweigh the risks.

"It's not really a question of getting the business, but getting it smart and without any major losses," he said.

To minimize risk, Weidemann indicated that the company would begin offering loans through its dealerships in Beijing and Shanghai, the most mature markets in the country and the only areas where sufficient credit information is available.

"These are probably the two fastest growing markets in this area and they are already covering a population of around 36 million people so by European standards, that covers a complete country," he said.

China also lacks the necessary regulatory framework allowing car financing lenders to easily reposses autos in the event of default. Repossession does occur in China by those currently offering auto loans, but the process is lengthy, costly and the outcome questionable.

"If it happens, it happens and you have to go through a very long court procedure which can take six months," Weidemann said. "You can repossess but it's a very time-consuming process and there's the phrase 'In front of the law, you never know what will happen'."

Other systemic problems are also likely to constrain lenders like GMAC. Although reform plans are afoot, interest rates are still set by Beijing and the auto financiers are only allowed to extend loans between 10 and 30 pct above the benchmark lending rate.

Analysts have cautioned that this will not allow the companies to properly manage their risks, by adjusting rates based on the risk of a particular borrower. Weidemann agreed, saying that the company would like the freedom to set its own interest rates and extend properly priced loans according to borrowers' credit profiles. Even within the narrow constraints set by Beijing, GMAC will not be looking to win business by offering the cheapest loans in town, he said. "From a practical point of view, all of the big four [state-owned commercial banks] offer the lowest interest rate to customers," he said. "When we look at the pricing we believe that rate is not profitable so we probably won't compete with the domestic banks on price, but instead want to compete on service." Although he would not provide specific growth figures, Weidemann said that the two partners will begin with a 500 mln yuan deposit to be placed with local banks and financial institutions, as dictated by CBRC rules, with the company entitled to lend up to ten times this equity. "It would be very easy to lend out this 5 bln yuan - the only question is what is the price, or the risk, that you want to take and if we see that we will surpass this amount, we will inject the necessary money," he said. He said that the joint venture would seek a further injection from its shareholders, or tap the interbank markets should more funding be needed. In developed markets such as the US, GMAC does more than auto financing, offering services such as mortgages and insurance. Despite the sweeping liberalization of China's financial services industry, Weidemann said that the day is still far off when GMAC in China would be operating along similar lines. "I wouldn't be surprised if in 10 years time you wouldn't see GMAC mortgage lending. That would mean having to apply for a bank licence," he said. In the meantime, in spite of obvious pitfalls and concerns that the car companies are lining up to lose their shirts in the murky Chinese credit market, Weidemann remains confident that GMAC will have all the bases covered. "There are a lot of challenges, but in the case that we wouldn't be confident to handle these challenges we wouldn't have applied for a license," he said. (1 usd = 8.3 yuan) david.wilder@afxasia.com

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