
Financial institutions bemoan regulation in the United States, but it’s a drop in the bucket compared with lending in the People’s Republic of China.
Non-bank financial companies — and their equity investors — have to be approved by the China Banking Regulatory Commission. Companies cannot expand branches without regulatory approval nor can they change their name, business scope, equity structure, or executive leadership. And no loan can exceed 15% of a borrower’s net capital. If any of these rules — or any of the other 40 articles of regulation outlined by the CBRC — are violated, the government holds the right to suspend operations and take over management if the situation is deemed a credit crisis for consumers. And there are even more rules for captives and depository bank institutions.
Suffice to say, navigating the regulatory landscape can be fraught, but the Chinese government is making moves to loosen restrictions and open markets to foreign investment in auto finance.
On April 9, President Xi Jinping made a broad announcement about China’s efforts to expand reforms and open up markets. Two days later, Yi Gang, governor of the People’s Bank of China, elaborated on how those reforms will play out in the finance sector in the coming months. Gang introduced 12 initiatives the PBOC will implement this year, including plans to “encourage foreign ownership in trust, financial leasing, auto finance, currency brokerage, and consumer finance.”

Kelly Zhou, director at Deloitte Consulting China, believes this policy will bring more investors to the space, however, she could not specify what the changes will mean for auto lenders in China moving forward. For now, lenders will have to wait and see.
“I really don’t think there is any substantial meaning at this time,” Winston Xue, general manager of financial services at J.D. Power China, told Auto Finance News.
China’s “massive” state-owned banks still hold a lot of power over the industry, a trend unlikely to change anytime soon, said Michael Dunne, president of the newly named consulting business ZoZo Go.
“Foreign companies have been angling to crack China’s auto market ever since financing become a feature in the early 2000s,” said Dunne, who was formerly president of General Motors Indonesia and managing director for J.D. Power China. “So even as China is ‘opening up and welcoming’ foreign investment, the hurdles to success remain significant. Foreign companies would probably need to lose money for five years or more as a price of market entry.”
Additionally, the Chinese government announced it will slowly lift OEM restrictions requiring partnerships with Chinese manufacturers. Currently, foreign auto manufacturers are required to form 50% joint venture structures with local companies if they want to operate in China. However, starting this year, electric vehicle manufacturers will be exempt from those requirements. Commercial vehicle manufacturers are next on the list in 2020, and the broader consumer combustion engine OEMs will follow in 2022.
Yet, many of the financial arms of those companies — like Daimler, BMW, and Volkswagen — are still beholden to the joint-venture structure. Of the 25 auto lenders in the country, 15 are foreign investors, Ziyou said. Ford Credit China, for one, operates as a wholly owned entity, not as a joint venture.
Lin Wei, partner of strategy at KPMG China, said the move to open the country’s auto finance markets is “generally positive,” and those who have not already entered the market — such as Tesla — may be enticed by the prospect of collecting 100% of the sales profits. However, Wei is unsure if manufacturers already in these joint ventures will want out.
Ford Motor Co. as a manufacturing unit is making a push to deepen its 20-year joint venture relationships with Changan Automobile Group and Jiangling Motors Group, according to Reuters. Following a 23% year-over-year slump in sales through March, the company is preparing for a new product blitz and a campaign to localize management in China, Peter Fleet, head of Ford’s Asia-Pacific operations, said in the report.

Despite the potential for lifting joint-venture requirements, OEMs are quite reliant on them. For example, Toyota Motors announced in May that it will help produce and sell GAC Motors vehicles in its Chinese showrooms in an effort to meet the government’s requirements that 10% of an auto manufacturer’s production is comprised of electric vehicles by 2019.
Like U.S. car buyers, Chinese consumers have hangups about electric vehicles: the degradation of batteries over time and range on a single charge, Wei said. Ultimately, J.D. Power’s Xue believes this meddling with the joint venture structure will have minimal effect on the captives. Whether OEMs pull out of those agreements is “a business decision that rests with each automaker,” he said.
Used-car financing has also gained steam, in part, due to easing regulation, and KPMG anticipates this trend to continue, according to a new report provided to AFN. In 2016, the State Council lifted restrictions on trading cars across China’s various provinces. However, the process has been slow, Luo Lei, the China Automobile Dealers Association’s deputy secretary-general, said in a news report last year.
Seven provinces that opened their borders saw double-digit growth in used-car sales, which was significantly higher than the growth recorded in provinces that maintained limitations, Lei said in the report. These cross-province used-car sales will support residual values moving forward, and “vehicle electronic information archive systems will improve information transparency,” KPMG said in the report.

The growth in used cars can also be exemplified by the companies investing in remarketing capabilities. Chinese e-commerce company SouChe acquired dealer-to-dealer auction platform Cheyipai in order to accelerate the creation of a used-car trading platform that incorporates vehicle valuations, thereby helping solve some of the country’s used-car market problems, SouChe Founder and Chief Executive Yao Junhong said in a press release.
In the first 11 months of 2017, used-car sales shot up 20% in China, to 11 million; sales are expected to nearly double to 21 million by 2021, according to Ipsos data. Meanwhile, the pace of new-car sales has slowed as more OEMs enter the competitive space and compete “fiercely” for marketshare, KPMG noted. Many of those manufacturers may turn to leasing to boost new sales.
State Council and the Ministry of Commerce People’s Republic of China seek to grow the leasing industry through the easing of licensing, financing, risk control, and supervision. In 2016, some 600,000 leases were originated — the equivalent of a 2.5% penetration rate — according to a 2017 joint study from KPMG and RVI. However, more than 95% of those “leases” are similar to what U.S. auto lenders would consider standard auto loans — which KPMG refers to as lease-loans. That would put the effective lease penetration at less than 0.1%.
Still, these lease-loan products are poised to grow as consumers can use them to acquire vehicles with residual values significantly lower than used car market value and with low down payments that make it easy to apply no matter what a consumer’s credit history, according to the report.
However, they offer less flexibility than typical U.S. leases because consumers have to buy the car at the end of the term. KPMG estimates close to 1 million of these lease-loan products will be originated in 2018 and 8 million by 2026, for a penetration rate of 23%. Yet, all of these developments within China do not shield it from the larger global economy, J.D. Power’s Xue said.
“The biggest challenges facing lenders today in China are used-vehicle valuations and high-interest rates,” he said. “Consumers in China are no different than those around the world when it comes to the value of a vehicle and the interest rate associated with a purchase.”