China's auto financing market is set to triple by 2017 with young buyers more willing to borrow for high-ticket purchases.
“Life would be unimaginable without credit”, says 27-year-old dance instructor Mia Zhao, who recently took out a loan for her new $88,000 BMW 530Li. Zhao continues, “I don't see why I can't spend future money if I can make monthly payments”, highlighting the younger generation's casual attitude towards borrowing in a country with the world's highest savings rate.
Cao He, an analyst with China Minzu Securities Co, believes the generational shift will bring about a “golden era for China's auto financing business”, estimating financing will triple by 2017 as the nation's youths buy their first cars. In 2011, auto financing companies provided around 200 billion yuan ($31 billion a figure Minzu believes could reach 600 billion ($94 billion) in five years time.
Carmakers are already preparing for the new wave of auto financing in a market where only 10% of vehicle purchases were paid for by loans. GM, VW and Chery have already created auto financing divisions. Since forming a local joint venture in 2004, GMAC-SAIC Automotive now manages 35 billion yuan in assets, while fellow auto giant VW has earmarked 2 billion for investment in vehicle finance. BMW AG has also seen its loans portfolio rise more than sixfold to 10 billion yuan since 2010.
Luxury carmakers are most likely to benefit from easy access to credit. Consumers buying cheaper cars are much more likely to pay outright in cash, whereas those making upmarket purchases are more likely to seek a loan. Nissan, the biggest Japanese automaker by sales in China, sees credit going down-market.
Nonetheless, performing credit checks for all prospective buyers could become costly and time-consuming for auto financing companies and, while easing restrictions would speed the application process up, it would also leave companies exposed to risky, non-performing loans. During the early 90s, poor credit checking lead to an explosion of bad loans, which in turn lead the central bank to suspend loans from 1996 to 1998.
Despite the potential risks, industry heads remain bullishly optimistic. Li Xincheng, chairman of Guangcheng Auto Group, claims only 0.5% of loans at his dealership go sour. The consumer demographic is also wildly different than the early 90s, “the level of affluence is higher, the credit system is more robust. People can forget about getting credit in future if they default on their auto loans.”