Opening Auto Finance Services in China

The Relevant Regulations

Per China's commitment to open the auto finance market after its entry into the WTO, the CBRC published the Administration of Auto Finance Companies Procedures (汽车金融公司管理办法实施细则)(Auto Finance Companies Procedures) on October 3 2003, and their Implementing Rules on November 12 2003. Furthermore, the CBRC updated the Administration of Auto Loans Procedures (Auto Loans Procedures) on August 16 2004, and they will be effective on October 1 2004. All of these regulations will help facilitate foreign investment into the Chinese auto finance market.

The Auto Finance Market in China

Prior to the issuance of the Auto Finance Companies Procedures, there was no independent auto finance industry. In China, the main providers of auto credit services have traditionally been commercial banks and insurance companies. In recent years, however, the provision of auto finance to consumers has declined sharply even as the auto market has grown. The main reason is that commercial banks and insurance companies do not have sufficiently specialized knowledge and experience in the auto finance service area.

With the new legislation, however, the Chinese market will re-orient itself with the introduction of foreign participation into auto finance.

The Legal Basis for Foreign Investment

Article 5 of the Auto Finance Companies Procedures provides that, to establish an auto finance corporation, the investor should satisfy the following requirements. For non-financial institutions, the total assets of the corporation in the previous year should be no less than Rmb4 billion or the equivalent in freely convertible currency, and annual revenue should not be less than Rmb2 billion or the equivalent in freely convertible currency. For financial institutions excepting banks, the registered capital of the institution should not be less than Rmb300 million or the equivalent in freely convertible currency.

Further, Article 7 of these rules provides that the registered capital of an auto finance company should not be less than Rmb500 million or the equivalent in freely convertible currency.

These two provisions on capital requirements have prevented domestic companies from entering the auto finance market because of their low capitalization. At the same time, commercial banks cannot currently establish auto finance companies according to the PRC Commercial Banking Law(中华人民共和国商业银行法). Therefore, foreign investors should have enough time to take a strong position in the market. It is forecast that foreign investors will take the leading role in the market.

Geographic Issues

Article 5 of the Auto Finance Companies Procedures provides that a foreign investor can only invest in one auto finance company. Article 14 of the Auto Finance Companies Procedures provides that auto finance companies can not establish any branches in China.

Subject to these articles, the business of auto finance companies will be strictly limited. SGMF's business, for example, can only operate in Shanghai.

However, the Auto Loans Procedures have freed things up a bit. Chapter 3 (Articles 13 -17) of the new rules provides that auto finance companies can offer credit to auto dealers. Hence SGMF, which has more than 200 auto dealers in China, could enlarge its business in cities where dealers are domiciled.

Conclusion

It is forecast that the total number of automobiles in China will reach 7.4 million in 2008, with an undoubtedly huge potential market for foreign investors. Unlike in the US and EU, auto finance in China is almost non-existent. The market for auto finance services will expand gradually, and with its capital and experience, foreign investment will help develop, and become important in, the auto finance industry in China.