There’s no subprime bubble in China auto loans

By Anjali Trivedi / BLOOMBERG

Slowing car sales and tightening credit look like a toxic combination for China’s auto-financing industry, which has exploded in the past few years. Concerns the sector is heading for a subprime-like meltdown may be overblown, though.

Sales in the world’s largest car market rose 2.3% in June from a year earlier, data showed last week. While faster than several analysts expected, growth decelerated from an 8% pace in May. Compared to the previous month, deliveries fell about 1% in June. The cooling coincides with Beijing’s quest to deleverage the financial system, which has led to tighter liquidity, reduced access to credit and, in theory, squeezed consumer discretionary spending.

In a report last week, analysts at Sanford C Bernstein linked the weakness in car sales to a slowdown in peer-to-peer (P2P) lending, pointing to “the deflation of what amounts to a subprime auto bubble”.

The relationship between car sales and credit in China is less clear than in other countries.

Like all forms of debt in the world’s second-largest economy, car loans have expanded rapidly. About 40% of the annual four trillion yuan (RM2.44 trillion) of auto retail sales are financed, a penetration rate that’s more than tripled from 12% in 2011. But that’s still low compared to a global average of 70% and the US rate of about 80%.

Give China Credit
Auto-financing penetration is rising quickly but remains below the global average.

China’s car loans are concentrated in higher-end or luxury vehicles, accounting for about 45% of sales versus 34% for mid-range models, according to research firm JD Power.

More than half of BMW AG’s sales in China are on credit, for instance, according to Goldman Sachs Group Inc.

A majority of loans in the 1.4 trillion yuan market are made by carmakers’ captive finance companies, with dealers and banks accounting for most of the rest.

These units pack loans into assetbacked securities, issuance of which totalled 16 billion yuan in the first quarter.

The delinquency rate was around 0.1%, despite higher interest rates. Other channels such as P2P lenders account for a much smaller portion.

As of June this year, loans from these online platforms totalled about 17 billion yuan, or 9.4% of the broader Internet lending industry, according to P2P lending data site wdzj.com.

Much of that was concentrated in the eastern province of Zhejiang, a relatively wealthy area.

Chinese auto-financing products tend to have lower loan-to-value ratios and shorter terms than in other mature markets, creating a buffer against defaults. Financing has higher margins, meanwhile, generating about 20% of operating profits for some companies while accounting for less than 2% of revenue.

Take China Zhengtong Auto Services Holdings Ltd, a Beijing-based and Hong Kong-listed dealership that specialises in luxury cars.

The company has increased its exposure to auto credit, taking secured borrowings on to its balance sheet that are mostly loans made by the finance arms of car manufacturers.

Zhengtong’s profit rose 71% last year as its financial services business assets — or loans — grew 64% to about seven billion yuan.

Car buyers may start to default in greater numbers eventually, but even if delinquency rates do spike, there’s less risk of a self-feeding spiral such as the one that triggered the US subprime mortgage crisis a decade ago.

That’s because, unlike the value of houses in a locality, the sale of one dud car doesn’t affect the price of another, especially when the market is small. In mature markets, for every new car sold, three used ones are traded. The ratio in China is about one to 0.4.

The impact on car sales of reduced financing availability is another matter.

About 40% of Chinese car buyers said they would delay purchases if they didn’t have access to credit, according to a recent JD Power survey of more than 9,000 people.

Still, slowing deliveries reflect other factors including manufacturers’ inventory management and the withdrawal of government subsidies such as grants for building plants and tax incentives for consumers.

The trade war with the US will also alter the landscape, attracting new entrants and affecting pricing.

If China’s car market is living on borrowed time, loans won’t be the only culprit.

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