November 16, 2004

The Chinese Credit Market

Simon contemplates the magnitude of default risk on Chinese auto loans:

Simon World :: Materialism's downside: You are part of an emerging economy, rapidly growing wealthier and becoming a world power. To go with your new found status you buy a car financed with a loan from one of the Big Four Chinese banks. And it turns out that one in every two of you can't afford the repayments. In other countries big banks with default rates higher than 50% on their auto loans would be at the very least intensively audited by the authorities. In China they get ready to float them on the stock exchange.

Posted by DeLong at November 16, 2004 07:26 PM | TrackBack

It all falls on the shoulders of the peasant farmers, who neither have the time, means or will to protest.

Posted by: chickensoup at November 16, 2004 07:36 PM

Not to be un-alarmist, but the article linked to from Simon World is a bit less panicky:

What we have here is 100 billion yuan in non-performing car loans, which maps onto $12 billion, or maybe $10 per capita, country-wide. The big problem with this number is not the magnitude, nor maybe even the fact that it's greater than 50% of outstanding car loans, which is a pretty new business in China. I guess it should make you wonder whether the pattern of loans made to Chinese consumers for cars bears any similarity to the lending Chinese banks have done to much larger concerns. The car loans are likely to look (and be) unperforming pretty quickly, while a 10-year note for a commercial, how horrible is the Chinese real estate lending situation these days?

Posted by: Jonathan King at November 16, 2004 08:34 PM

I wrote:

> Not to be un-alarmist, but the article linked to from Simon
> World is a bit less panicky:

OK, so I did a couple of quick Google searches, and now I *am* a bit panicky. This one's amusing:

And then there's this one:

The difficulty is that the translations seem a bit weird, so I don't know how to interpret something like this:

# At the end of October, about 10 percent of non-performing
# loans, totaling some US$1.6 trillion, were made to the real
# estate sector.

OK, so does this mean there are $16 trillion in non-performing loans, $1.6 trillion, $160 billion or some other number? And then what percentage of non-performing loans are neither in real estate nor automobiles, and what are they secured with? Does anybody know of an authoritative source on this stuff?

Posted by: Jonathan King at November 16, 2004 08:52 PM

If you've been to Beijing, you've probably seen the giant, largely vacant office complexes along the western side of the Third Ring Road. I don't know what the situation in other booming cities is, but if Beijing is any indicator, there's going to be a real estate lending crisis pretty soon.

As far as car loans go, I'd want borrowers to have insurance up the wazoo. Beijing driving makes Boston look disciplined. I've never seen so many traffic accidents of all varieties as I did in Beijing.

Posted by: LarryB at November 17, 2004 12:16 AM

The figure usually quoted is that up to 40% of Chinese bank loans (corporate and consumer) are believed to be non-performing. That's not the official figure of course, which is more like 20%. It's a very worrying situation, but it's less alarming than you might think. The Chinese government has set up several 'asset reconstruction companies' to buy the loans and either work them out or sell them on. The big US investment banks are falling over themselves to buy up these loans at bargain prices.

Posted by: Ginger Yellow at November 17, 2004 01:42 AM

November 12, 2004

Boom Time for Credit in Southeast Asia
By WAYNE ARNOLD - New York Times

Chamikorn Buranananda has a vision of a Thailand where everyone, rich or poor, city dweller or rice farmer, is in debt - be it for a car loan, mortgage, a credit card or some other loan.

"You want an educated population that can manage debt," said Mr. Chamikorn, who after helping General Electric start its own finance operations in Thailand has moved on to become managing director at Capital OK, a consumer finance start-up with ties to Prime Minister Thaksin Shinawatra.

Capital OK is a newcomer in a market that has been gathering momentum in Thailand and throughout Southeast Asia for the last four years. As strengthening economies enable more consumers to emerge from poverty to the lower middle class, banks and finance companies are greeting them with financing options once limited to developed nations.

"It is booming," said Supavud Saicheua, an economist at Phatra Securities in Bangkok. "There are lots of finance companies and banks interested in expanding the business." In Thailand, consumer credit grew 35 percent last year, according to Fitch Ratings, sending the average household's debts up to 52 percent of its income.

That consumers will borrow and repay is a welcome switch for Southeast Asia's banks after the untrammeled corporate lending that devastated them in the Asian financial crisis of 1997 and 1998.

But the region's banks are playing catch-up with aggressive foreign institutions like Citibank, G.E. and Aeon of Japan, which pioneered consumer finance in Southeast Asia after witnessing the markets take off in Japan, South Korea and Hong Kong.

By offering the long-neglected Southeast Asian consumer convenient loans, economists say, these lenders are helping to stimulate domestic consumption that can offset the region's dependence on exports, which ebb and flow.

This may seem to contradict conventional wisdom, which holds that Asians are prolific savers, averse to debt. Bankers say the growth of consumer finance is proving convention wrong. "It's a myth," said David Lum, regional head of banking at Daiwa Institute of Research in Singapore.

During hard times, Southeast Asians used to turn to informal financing networks among relatives, their villages or loan sharks. At the time, the region's own banks neglected consumers to focus on channeling the public's savings into corporate manufacturing and roads, bridges, steel mills, refineries and the like. When the crisis hit, it left banks buried in bad debts. Finance companies like GE Capital were the only lenders left standing.

"There weren't really any competitors," Mr. Chamikorn said. "The only competitors were loan sharks."

A native Thai and naturalized American, Mr. Chamikorn came to GE Capital in 1996 after stints around Asia for Citibank and American Express. GE Capital had purchased a stake in an auto finance company before the crisis, and in 1998, Mr. Chamikorn helped negotiate the discounted purchase of a portfolio of personal loans from Thailand's debt restructuring agency.

With so few rivals, interest rates for legitimate lenders went as high as 50 percent, and G.E.'s finance business in Thailand was so successful that the company's former chairman and chief executive, John F. Welch Jr., singled it out for praise in his autobiography, "Jack: Straight From the Gut."

What GE Capital's executives from Thailand impressed on Mr. Welch was this: despite low incomes, Asian consumers are excellent credit risks, even with interest rates much higher than corporations pay. That is because even relatively small loans - for a car or motorcycle - represent critical personal investments.

"People pay on time because a motorcycle is their livelihood," said Jackson Tai, chief executive of DBS Bank of Singapore, which owns 40 percent of Capital OK.

Posted by: anne at November 17, 2004 02:17 AM

November 9, 2004

Informal Lenders in China Pose Risks to Banking System
By KEITH BRADSHER - New York Times

WENZHOU, China - The Wenzhou "stir-fry" is not a dish you eat. But it is giving indigestion to Chinese regulators and could prove troublesome to many investors worldwide - from New York money managers, Pennsylvania steel workers and Midwestern farmers to miners in Australia.

Here in this freewheeling city at the forefront of capitalism in China, the dish is prepared when a group of wealthy friends pool millions of dollars worth of Chinese yuan and put it into a hot investment like Shanghai real estate, where it is stirred and flipped for a hefty profit.

The friends often lend each other large amounts on the strength of a handshake and a handwritten i.o.u. Both sides then go to an automated teller machine or bank branch to transfer the money, which is then withdrawn from the bank. Or sometimes they do it the old-fashioned way: exchanging burlap sacks stuffed with cash.

The worry for Chinese regulators is that everyone in China will start cooking the Wenzhou stir-fry and do it outside the banking system. In the last few months, borrowing and lending across the rest of China is looking more and more like Wenzhou's. The growth of this shadow banking system poses a stiff challenge to China's state-owned banks, already burdened with bad debt, and makes it harder for the nation's leaders to steer a fast-growing economy.

The problem starts with China's low interest rates. More and more families with savings have been snubbing 2 percent interest on bank deposits for the double-digit returns from lending large amounts on their own. They lend to real estate speculators or to small businesses without the political connections to obtain loans from the banks. Not only is the informal lending rate higher, but the income from that lending, because it is semilegal at best, is not taxed. For fear of shame, ostracism and the occasional threat from thugs, borrowers are more likely to pay back these loans than those from the big banks.

Posted by: anne at November 17, 2004 02:24 AM

Although its not entirely implausible, I'd suggest some skepticism about the claim that half of Chinese auto loans are non-performing. I have been trying to track Chinese NPLs for some time and I only find the claim in the HK Standard article linked to by Simon. Admittedly, I can only search English language articles since I don't read Chinese. The Standard article is vague about its source and the figure is probably only an estimate by somebody. And such estimates often turn out to be wildly wrong.

As for the question about the magnitude of NPL in China, according to official estimates, they were about 1.6 trillion RMB for the 4 wholly owned State Commercial banks (SOCB) and around 1.7 trillion if the joint-stock banks are added in. This compares to GDP for China of (again about) 11.6 trillion RMB for 2003. However there are substantial NPL also with a) city commercial banks; and especially b) rural credit cooperatives, although there are no official figures on either.

Posted by: cpigott at November 17, 2004 02:56 AM

Like many other important economic stats in China, the true NPL numbers are a mystery. The key is to remember that China's economy and banking system is not and has not been based on price but rather by Government order and connections. The car loan example is just a small pre-cursor to the larger looming problem on Chinese banks balance sheets. China bailed out two of the biggest banks to the tune of US$45 billion and they still have official bad loans of around 19% of assets.

The previous commenter also noted that many of the estimates do not even cover the huge number of regional banks and co-operatives, which are even worse, benig at the whim of the local cadre and not caring about credit quality or interest rates. You cannot view China through a market economy prism, even when they try and float their banks on Western stock markets.

Some relevant links:

Posted by: Simon at November 17, 2004 03:16 AM

NPL is a big problem in China. However, I'm very sceptical about the car loan example because personal loan/finance is still at its infancy in China. Most State banks don't deal with private individuals and most NPL come from other SOEs and insiders.

A more likely example in China would be:

You, as the CEO of a State-owned enterprise, have two cows. You borrow 10 million from a State bank, using the two cows as collateral. You give 1 million back to your bankers as kickbacks, 2 million to build an office block nobody needs, 5 million to bribe other officials to approve the building and give 2 million to your 18-year old son studying in the US. Meanwhile, the collateral (the two cows) died because there's no money to buy the feed.

Posted by: Weco at November 17, 2004 03:48 AM

Even more alarming is that Us hedge funds are forming JVs to market Chinese auto loans and securitise the receivables

Posted by: Tim at November 17, 2004 05:04 AM

lies, damned lies, statistics and Chinese statistics: in that order of believability.
How many cars in China? Never mind how many bad loans for cars?
Foreign and domestic investment in car manufacturing and the 'car fever' (iffy loan fed demand as a key component) is right now a bubble cycle. Ford and others are trying to loosen regs so they can get in the finance game - taking on any Chinese partner with access to the central government. As the car companies draw powerpoint presentations of straight vertical demand curves, they pour money into the industry. Steel prices, aluminum prices, gas prices all build in this 'assumed' Chinese growth. Then China lending hits a wall (a period of months? years? who knows but its coming.) Then what to do with that idle capacity to feed the Chinese market? Export mildly stripped down models to the US and European and Japanese market. Shut down overseas. And we'll be told that this is good for the American consumer because if Walmart succeeds this way, so can GM and Ford and Chrysler and Delco and Lear and Visteon and so on and so on.
This is what I would call the honey-pot theory of Chinese development.

Posted by: SkipWalkDC at November 17, 2004 07:22 AM

I apologise for being somewhat premature. The following item sent to me by a colleague seems to confirm the 50 percent NPL rate on auto loans. (Although in most cases, one should never completely believe figures on China's economy until they are independently confirmed at least several times)

Publication: CBnet - Industry Updates

Date: October 29, 2004

China Jan-June bad auto loans US$11.4b, NPL ratio over 50%
China's non-performing auto loans totaled 94.5 billion yuan (US$11.4 billion) in the six months to June period, with an NPL (non-performing loan) ratio of more than 50 percent.

At the end of June, outstanding auto loans in China exceeded 180 billion yuan.

The report said most bad auto loans were contracted in late 2002, when domestic commercial banks raced to get bigger market shares in auto lending, greatly lowering the threshold on auto credit applications.

To Of China's big four state-owned banks, the Agricultural Bank of China is responsible for most of the bad loans with its non-performing auto loans at 30 billion yuan.

Earlier the China Banking Regulatory Commission criticized the bank's auto NPLs and asked all local branches to terminate business with car dealers that accumulate large unpaid loans and stop lending to individual customers who want to buy vehicles for freight or delivery services.

All big four state-owned banks are working to recover bad auto loans in the last quarter this year.
Also, the officially reported estimate of NPL for city commercial banks is 14.08% for end-June 2004, although the articles I have contradict one another as to whether this figure is based on the reformed loan-classification system now used by the major banks, or the old one, which typically reports a lower percentage.

In any case, as noted by others commenting, the official numbers are widely recognised to substantially understate the level of NPL that will ultimately emerge from the existing stock of loans.

Posted by: cpigott at November 17, 2004 07:58 AM

Note that prices for automobiles in China are far higher than in America. The slowing of sales in China should bring more competition in prices, and a lowering. I doubt there is reason for concern about widespread default on loans however. China is growing nicely, and a soft soft landing is likely with intelligent monetary and regulatory policy.

Posted by: anne at November 17, 2004 08:53 AM

anne writes:
> I doubt there is reason for concern about widespread default
> on loans however. China is growing nicely, and a soft soft
> landing is likely with intelligent monetary and regulatory
> policy.

The concerns I now have are based on the fact that in some sectors, there was no effective regulartory or monetary policy, *and* it's difficult or impossible to get the real numbers out. So it seems that there is wide-spread acknowledgement that there has been a stupendous amount of overbuilding of high rise offices and such, but then also a bubble in housing prices. The only thing that gives one any confidence that the whole thing won't come crashing down in a heap is that an annual growth rate of around 9% can paper over a lot of sins. But since the current price levels for real estate cannot be sustained, and because some large (but not publicly knowable) percentage of loans are non-performing, the stage has been set for a very messy popping of the bubble. And the big concern I have is not that office rental in Shanghai suddenly becomes a lot cheaper, but that the unraveling in this market would cause a large unwinding of other positions that could cause substantial damage to our economy.

Posted by: Jonathan King at November 17, 2004 09:38 AM

Jonathan King

There is much reason to be cautious, but the rapidity of growth and middle class expansion and ample household middle class saving should allow for imbalances to be contained.

Posted by: anne at November 17, 2004 09:56 AM

anne writes:
> There is much reason to be cautious, but the rapidity of
> growth and middle class expansion and ample household
> middle class saving should allow for imbalances to be
> contained.

But there's a hole in the bucket. :-)

This thread started out by noting that the NPL rate for autos is over 50%. I guess this is consistent with the notion of middle class expansion, but less consistent with the ample household savings idea. And this is where the numbers we have are a bit scary. Real interest rates on savings in China right now are negative. That's another non-inducement to save. Now you could buy real estate instead, but then that brings us back to the housing bubble in the cities...

Posted by: Jonathan King at November 17, 2004 10:23 AM

Jonathan King

The non performing loan rate cited puzzles me. I am leery about any such number.

The Chinese saving rate is high, but you are wondering how savings are kept. Well, other than in property in urban centers and rural villages of emanation, I do not know. We must find out.

Posted by: anne at November 17, 2004 10:55 AM

October 27, 2004

At the Beijing Auto Show, Signs of a Behemoth to Come
By KEITH BRADSHER - New York Times

THE Beijing auto show is starting to look a lot like auto shows in Detroit or Frankfurt or Geneva, a sign of how China has become one of the world's great industrial powers.

The idiosyncratic, locally built clunkers found in other developing countries, like the Ambassador cars of India, are nearly gone. In their place are sleek models made in China by practically all of the world's multinational automakers -- sedans from Honda, minivans from General Motors and sport utility vehicles from Toyota -- and a range of locally designed cars.

Some of the local cars are cramped and underpowered, like the $4,000 ''minicars'' with minimal safety equipment or seat padding and engines that could belong in a motorcycle. Yet even these come with air bags now, thanks to the government's increasing concern about traffic deaths.

Auto shows, and the cars they flaunt, are windows into countries' souls. On display here is a China where the rich desperately want to live Western styles of life, even if they have mixed views about Western governments. But it is also a China that is trying to become more self-sufficient, with homegrown manufacturers presenting their own designs as well as the cars of their multinational partners.

''They're putting a lot of money into it to come up with a new aesthetic,'' said Ed Wong, a contract auto designer in Shanghai who works for many Chinese automakers. ''Some countries, it took them 20 or 25 years; the Chinese want to compress that.''

Joint ventures between multinationals and Chinese automakers dominate the Chinese market, accounting for more than four-fifths of sales. (More than 120 Chinese automakers share the rest.) But the Shanghai Automotive Industry Corporation, First Automobile Works and the Dongfeng Motor Corporation are learning to put their global partners' knowledge into their own cars.

Their auto-show offerings are less blockish and more sophisticated, making them harder to distinguish from the multinationals' products. One car, a cross between an S.U.V. and a minivan, created by the Chery Auto Company, drew particular attention as a design as polished and sleek as the Chrysler Pacifica.

''If you look back two years ago, the lines were less resolved,'' said Paul Blokland, the director of Segment Y, an automotive consulting firm based in Bangalore, India.

What is not clear is whether cars made by Chinese companies will become discernibly Chinese. Government regulations in most industrial countries now limit designers' options, restricting vehicle weight to improve fuel economy and requiring that front ends not be too sharp or too rigid to reduce injuries to pedestrians.

China has adopted many of the same safety and environmental regulations, usually choosing the European version because Volkswagen remains the largest automaker here. It has chosen the American standard a few times, and in a couple of cases has drafted its own rules, notably for fuel economy.

''The legislation obviously plays a part in it,'' said Terry Spall, the general manager for Asia at the Motor Industry Research Association, a trade group in Nuneaton, England, that has helped a dozen Chinese automakers set up test tracks and other automotive research sites.

The automaker that is building the most elaborate test facilities and design studios in China is General Motors. Its designers contend that Chinese customers will still have some special tastes, and they want to reflect these tastes in their cars.

G.M. designers and stylists point out that a person's house is the center of Chinese life. The first character of the double Chinese character for a limousine is the same as the first character of the double character for a house. In choosing how to travel, Chinese buyers effectively want to ''bring a piece of house with them,'' said James Shyr, the design director for G.M. China.

The first character of the double character for a sedan, a four-door car, is the same as the first character of the double character for a sedan chair, or palanquin. G.M. already tries to make the rear seats of its cars as much like two chairs as possible, as in a palanquin, on the theory that it should be possible for two adults to sit in comfort in the back. Back seats are just as likely to hold the car's owner as they are a bunch of children, because chauffeurs only cost a couple of hundred dollars a month and getting a driver's license is an extremely bureaucratic process.

Posted by: anne at November 17, 2004 11:17 AM

Colleagues of mine from China are astounded students here can borrow money to go to university. Apparently, the default rate is very high in China and so loan availability is very low. Also, it seems it's very easy to default and face no penalty, you just move elsewhere and change your name. So, if that's happening to university graduates...

Posted by: chickensoup at November 17, 2004 07:41 PM

One thing that needs to be kept in mind is the definition of "non-performing consumer loans" in China is nuanced differently than the U.S.

In the U.S., "non-performing" almost always means "unable to pay", whereas in China, with an immature consumer credit culture, no centralized credit reporting services, and a weak and capricious civil law system, "non-performing" as often as not means "unwilling to pay" or even "uninterested in paying". There is no deeply engrained cultural dread of "bad credit" yet.

It is reasonable to expect that the automotive NPL rate could be brought down significantly with stiffer enforcement.

Posted by: Michael Robinson at November 17, 2004 08:12 PM

"It is reasonable to expect that the automotive NPL rate could be brought down significantly with stiffer enforcement."

Yes, but is it reasonable to expect stiffer enforcement? And remember that car loans are only a small part of the problem. Loans from Chinese banks are seen as gifts, not loans, yet people think that their savings are safe, guaranteed by the government. Something has to give, at some point.

Posted by: gweipo at November 20, 2004 07:28 AM