China Plays The Credit Card

Beijing is urging consumers to take on debt

At western Beijing's Parkson Shopping Center, Zhou Jinghong is excited about buying a new Volkswagen Santana 2000. A 30-year-old owner of two restaurants, Zhou had long desired the $22,600 car, but she had to put off the purchase for months because her business was slow. Now, if she qualifies, she'll be able to own the car in a week--thanks to a two-year, $17,000 car loan offered by Agricultural Bank of China bearing an interest rate of around 6%. "The sooner the better," she says with a smile.

Consumer lending, once virtually nonexistent, is suddenly everywhere in China. Buy a computer. Buy an air conditioner. Even buy an education with a low-interest student loan. What's behind the lending frenzy? Beijing hopes that by getting consumers to start purchasing, it can help stem almost two years of sluggish spending that has sent prices tumbling and caused unsold industrial goods to pile up in warehouses.

Beijing officials have another goal in mind: They hope to give China's struggling banking sector a push in the direction of modernity. A broader lending base that includes Chinese consumers would give banks more diverse sources of revenue as they struggle with $250 billion in bad loans to state-owned enterprises. Experience in retail lending could give banks the opportunity to develop more sophisticated credit analysis as consumers gain spending power. "We want to make our bank more international and commercial," says Cui Dianman, an official with China Construction Bank, which is boosting retail lending.

Some multinational carmakers see the lending push as a chance to increase sales and win points with Beijing. On June 7, GM launched an agreement with the China Construction Bank and the Industrial & Commercial Bank of China to finance purchases of its new $40,000 Buicks, manufactured in Shanghai. While private buyers have bought only 10% of the Buicks sold since assembly started in April, GM officials hope the loans will increase such sales. "We're here to help GM sell more cars," says Scott Reno, director of financial services at GM China Inc. "Financing is an integral part." Ford Motor Co. has been working with the Construction Bank since April to provide financing for its $30,000 Transit. All 200 Ford dealers plan to offer loans, and the company expects to finance 10% of car purchases by next year. Honda may follow suit.

RISK FACTORS. Such activities are still tightly controlled. Beijing requires auto makers to work with Chinese banks rather than use their own consumer- credit units, and to offer loans only for cars they produce domestically. But in the future, multinationals hope to provide a full range of financial services. In talks with the U.S. earlier this year, China suggested it will give foreign firms greater access to the consumer-credit market as part of its bid to join the World Trade Organization.

Banks also are jumping at the chance to offer consumer loans. Since Beijing liberalized the credit field in March, banks have been advertising speedy loan approvals and simple application procedures. "Every bank sees this as a new opportunity," says Cao Yi, vice-general manager for business development at Beijing City Commercial Bank. "Competition is becoming very strong."

But where there's opportunity, there's risk. The lack of a sophisticated system for gauging creditworthiness and the difficulty in collecting from deadbeats increases the possibility that banks could become even more exposed to bad debts. "Try repossessing a vehicle from some party chief," says a Western economist in Beijing. "Good luck."

Banks also are looking for ways to spread the risk among several institutions. For the loans being flogged at Parkson, for instance, the obligations are guaranteed by a joint venture that includes the department store, national car dealership Yafei Auto Chain Store Co., and Shanghai Automobile Industry Sales Corp.--the Chinese manufacturer of the Santana. Since China has no private credit agencies, banks also hope that tax and public security bureaus will exchange data on potential borrowers with banks to ensure their creditworthiness. As an added safeguard, banks require car buyers to purchase individual credit insurance, adding one percentage point to the cost of the loan.

But getting consumers to spend in the first place won't be easy. Chinese workers on average squirrel away 40% of their salaries, and they have amassed $720 billion in household savings. Prices of consumer goods have declined for the past 19 months because of overproduction and slack demand. Consumers would rather wait to make big purchases lest prices drop further. Beijing's enterprise reforms, which are leading to big layoffs, are adding to worries. "The Chinese aren't confident about their future," says Hermann Schmitt, senior adviser to FAW-Volkswagen Sales Co. "If the people that have money aren't spending now, why will those who need financing decide to do so?"

HESITATION. That's one reason why GE Capital recently shut down a two-year-old financing program for electronic appliances in Guangdong province. A GE Capital spokeswoman says the firm isn't soliciting any new business because the timing isn't right. And even in the best of times, Chinese consumers are likely to take slowly to borrowing from the bank, instead preferring to turn to family and friends when financially strapped. Many Chinese are reluctant to take on personal debt--particularly the older generation. "In my whole life I've never borrowed from anyone," says one 57-year-old retiree who was shopping for a color TV at Parkson. Even though the set she wants to buy costs seven times her monthly allowance, she says she still won't consider taking out a loan.

Nonetheless, Beijing is not letting up on its campaign to create a nation of borrowing consumers. New financing plans are being trumpeted in the media every week, and traditional sentiments are changing among a younger, more consumer-oriented generation. Indeed, the retirees 35-year-old daughter is at least amenable to the idea. "I'm interested in using a loan for a car or apartment, not for something small," she says. That's exactly what Beijing, the banks, and manufacturers have in mind.