China Car-Loan Defaults Climb, Hurting Insurers
A worrying sign for China's fledgling consumer-credit industry has popped up in the country's booming car market: an increasing number of buyers aren't paying back their auto loans.
China's banks, insurers say, are making too many car loans -- totaling about $4 billion in the first half of 2003 -- to customers they don't know well. That leaves insurers holding the bag when buyers can't pay for their vehicle, disappear with it or simply abandon the car to buy something cheaper.
As a result, the insurance industry is pulling back from the two-year-old business of providing banks with guarantees that auto loans will be repaid. Ping An Insurance's Shanghai operation, for instance, recently stopped writing auto-loan default policies, with defaulters proving more numerous than expected and China's patchy legal system making it tough to chase them down. "Because people don't have a strong respect for the law, it is difficult for us to get recovered," said Chen Fei, manager of the firm's car-insurance business. "We don't have that much energy."
No one seems to have reliable numbers on the size of the insurance industry's losses or whether car sales have been affected, but widespread reporting on the problem in China's otherwise upbeat media suggests a painful sting. Caijing magazine said that in the first half, insurers in one relatively wealthy eastern city, Wuxi, paid claims of around 25 million yuan ($3 million), or 93% of what they garnered in premiums, up from 46% in 2002.
This worrying trend, described by insurers, bankers, car makers, court officers and in domestic media reports, takes some of the sparkle off the surging car sales that have turned China into one of the world's largest auto markets. More broadly, it offers a counterpoint to views that high personal savings and cultural aversion to debt make China's consumers low-risk borrowers, customers who offer the country's banks their best hope for strengthening their wobbly balance sheets.
The auto-loan problem also suggests the country's banks simply know very little about the people who borrow: whether to buy cars, homes or for other purposes. Lenders at some of China's biggest banks don't even have the computer capability to determine if a potential borrower has an account with the bank. In recognition of how little they know about customers and how tough it can be to attach a lien on a car loan, banks have required perhaps 2% of their borrowers to buy default policies on auto loans.
Additionally, the model for China's credit-bureau industry is in Shanghai, but even that business remains a virtual island four years after it opened, basically unconnected to credit bureaus that exist in the small number of cities that have their own.
Such pitfalls raise questions not only for Chinese banks as they dive into the consumer-credit business, but also for foreign banks and finance companies that see vast opportunities in China for products such as credit cards.
Until insurers complained they were getting burned in their corner of the auto-loan business, any such fears were mostly theoretical, because banks consistently report that bad consumer loans constitute less than 1% of the total of consumer loans. That compares with perhaps half for all loans being reported as nonperforming.
"The problem of this business is that it is too costly to get individual credit information, and there is still a lack of a system providing adequate information," says Xu Lei , chief of the vehicle-insurance department at China Pacific Property Insurance Co. in Shanghai.
For now, this problem affects only Chinese banks and insurers. That is because the country hasn't opened up the auto-financing business to foreign companies, something it was supposed to do when it joined the World Trade Organization in 2001.
Meanwhile, car owners are responding to the auto industry's fierce price competition and widening array of model lineups by abandoning their old car -- and its loan -- to buy a new car. Scofflaws see little risk of being found out and denied loans elsewhere. "Falling car prices" and "fluctuating incomes" are the two main reasons buyers default, says a Shanghai insurer.
Compromises are being worked out in some cities, where banks are agreeing to shoulder more responsibility, such as paying the entire 1% to 2% premium cost themselves or having only a portion of a loan covered. Still, a Shanghai judge who has seen a number of car-default suits expresses frustration that borrowers can be made to pay: "The major problem is, we just can't find the car buyers and the cars."
中国汽车市场的难言之痛
对刚刚起步的中国消费信贷业来说
