Chinese Cash Squeeze Causes Auto Dealer Panic, Group Says

China Cash Squeeze Sparking Panic by Auto Dealers Over Financing
An Audi AG Q5 compact sport-utility vehicle (SUV), right, stands on display at a dealership in Shanghai. Vehicle dealers in China typically rely on lines of credit from banks to finance their orders for vehicles from automakers. Photographer: Tomohiro Ohsumi/Bloomberg

China’s cash crunch is spreading to the nation’s auto dealerships as they become increasingly reluctant to ship their vehicles to neighborhood car lots without upfront payment.

“With the cash squeeze, authorized dealers are no longer willing to hand over their cars on good faith,” Chi Yifeng, general manager of Beijing Asian Games Village Automobile Exchange, a car shopping plaza, said in an interview yesterday. “They’re holding tighter to their capital and are more cautious about their business plans.”

While money-market rates have fallen from last month’s highs, Chi’s comments show that funding concerns in China aren’t over. The squeeze will probably dry up 750 billion yuan ($122 billion) in credit this year, an amount equivalent to the size of Vietnam’s economy, according to a Bloomberg News survey of 15 analysts.

“The cash crunch has led to psychological panic among dealers over access to financing,” Luo Lei, deputy secretary-general of the China Automobile Dealers Association, said in a phone interview from Beijing yesterday. “So far, it hasn’t caused any real damage to the industry, but if the cash crunch continues, the impact will spread to auto dealers.”

According to a dealer survey released by the association yesterday, about 28 percent of respondents said they felt “anxious” about their funds last month, up from 11 percent in May. Only 21 percent of respondents said they had ease of access to financing in June, down 27 percentage points from a month earlier, the survey showed.

‘More Pain’

“It’s just the beginning -- a liquidity crunch in the interbank market is set to ripple to economic activities on the ground,” said Xu Gao, Beijing-based chief economist at Everbright Securities Co., who formerly worked at the World Bank. “We will see more and more pain in the real economy stemming from the crunch.”

Vehicle dealers in China typically rely on lines of credit from banks to finance their orders for vehicles from automakers. They also take out loans to pay for construction of new outlets. About 85 percent of buyers pay for their auto purchases in cash, which helps ease the pressure on dealers, Luo said.

Borrowing Costs

The cash squeeze has eased since interbank borrowing costs surged to record highs on June 20, with China’s money-market rate declining for a second week on speculation the People’s Bank of China injected funds into select banks.

June credit data due as soon as this week will give investors clues to how much the cash squeeze is affecting the world’s second-biggest economy. In the latest sign of financial strains in China, state media have reported that the northern city of Ordos has resorted to borrowing from companies to pay municipal workers.

China Rongsheng Heavy Industries Group Holdings Ltd., the country’s biggest shipyard outside state control, earlier this month said it sought government financial support and is in talks with financial institutions about renewing credit facilities.

The dealer association’s survey also found that 56 percent of respondents reported a decline in demand in June, compared with 23 percent in May.

The state-backed China Association of Automobile Manufacturers is scheduled to release wholesale vehicle sales data today.

— With assistance by Tian Ying

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