Mia Zhao says her parents, part of the generation that came of age in the 1970s, before China introduced free-market reforms, would never spend beyond their savings. Zhao, by contrast, has no problem with debt if it helps her get the things she wants -- like an $88,000 BMW 530Li.
“Life would be unimaginable without credit,” said the 27-year-old dance instructor in Beijing, who bought the car in January. “I don’t see why I can’t spend future money if I can make the monthly payments.”
Zhao’s casual attitude toward borrowing -- in a country with the world’s highest savings rate -- is a harbinger of a generational shift that could spur a new wave of automobile sales in China.
Companies such as market leaders General Motors Co. and Volkswagen AG, and domestic producers like Chery Automobile Co. have all formed auto-financing divisions. They stand to gain since only 10 percent of vehicle purchases are financed by loans in China, a ratio that China Minzu Securities Co. estimates will triple by 2017 as more of the nation’s youths buy their first cars.
“The next five years will be the golden era for China’s auto financing business,” said Cao He, an analyst with Minzu in Beijing.
Auto financing companies provided about 200 billion yuan ($31 billion) of loans last year, according to carmaker Guangzhou Automobile Group Co. The China Association of Automobile Manufacturers projects the market for vehicle loans will expand to 525 billion yuan by 2025.
Those prospects bode well for GM’s local auto-financing venture, GMAC-SAIC Automotive Finance Co., which in 2004 began providing loans for Buick, Chevrolet and Cadillac cars. It now manages 35 billion yuan in assets.
“We have recently seen a strong increase in young customers,” Rick Livingood, general manager of GMAC-SAIC, said in an e-mail. “The post-80s generation, which tends to be more open to credit consumption and has a certain auto purchasing power, has gradually entered employment.”
To cater to growing ranks of those buyers, GMAC-SAIC offers loans with low initial monthly installments that increase over time. The plan, at first available only for Chevys, was offered to Buick customers last year.
Volkswagen, the No. 2 foreign manufacturer in China after GM, plans to invest 2 billion yuan to expand auto-financing in China this year, said Cai Xue, a VW spokeswoman in Beijing. The company’s auto loan business rose 56 percent in 2011, and the finance unit now offers loans targeted at customers looking to upgrade to more expensive models. Buyers 25 to 45 years of age accounted for almost 80 percent of the loans as of last year, the company said.
Bayerische Motoren Werke AG says its China loans portfolio has risen to more than 10 billion yuan, a six-fold increase over 2010. BMW forecasts that a quarter of all auto purchases in China will be funded by loans in three years and that half will be financed by 2025.
“Young Chinese are very comfortable with the idea of credit to buy big-ticket items,” said Shaun Rein, managing director of China Market Research in Shanghai. “It doesn’t make sense for them to have to work for 5 to 10 years to save up for it.”
Nissan Motor Co., the biggest Japanese automaker by sales in China, sees credit going down-market. Currently, buyers of expensive cars seek financing while those who want more modest vehicles typically pay cash, said Kimiyasu Nakamura, president of Nissan’s joint venture, Dongfeng Motor Co.
“We think there will be more and more young people using our loan products when they buy cheaper cars,” Nakamura said last month at a Nissan event in the northern port city of Dalian, where the automaker is building a new plant.
The surge in demand for financing has some risks. One problem is that checking the credit-worthiness of every buyer can be labor intensive, said Yale Zhang, managing director at Autoforesight Shanghai Co.
“If you want to make the process fast, the only way is to loosen it up,” Zhang said. ’’That’s the danger.’’
Non-performing auto loans surged in the 1990s, owing to a lack of risk controls such as credit scoring. That led the central bank to suspend new auto loans from 1996 to 1998, according to He Liming, head of the China Automobile Dealers Association.
The banking regulator again tightened lending rules in 2008 after an explosion of bad loans in the late 1990s. Today, the China Banking Regulatory Commission requires that auto loans not exceed five years for new cars and three years for second-hand purchases. Buyers can borrow as much as 80 percent of the price of a new car, and 50 percent for pre-owned passenger vehicles.
That’s not hindering the credit culture that’s taking root in China. The China Banking Association estimates credit card transactions rose 48 percent in 2011 to 7.6 trillion yuan, according to the official Xinhua News Agency. Credit card balances overdue for more than six months rose 9.1 percent from the previous quarter to 12 billion yuan as of the end of March, the People’s Bank of China reports.
Still, Li Xincheng, chairman of dealership chain Guangcheng Auto Group, is confident history won’t repeat itself. About 0.5 percent of loans at his dealerships go sour, far below the worst days two decades ago, he said.
“Things are different now from the 90s,” said Li, whose dealerships sell cars from GM, Toyota Motor Corp. and Honda Motor Co. “The level of affluence is higher, the credit checking system is more robust. People can forget about getting credit in the future if they default on their auto loans.”