By on May 28, 2009

So it’s the evaporation of easy credit that caused carmageddon? Don’t tell that to the Chinese. China became the world’s largest car market (as of the first quarter of 2009) with the bulk of its people paying cash for their cars. Until 2004, getting a loan for a car was more or less unheard of in the Middle Kingdom. Even after 2004, one could only finance a maximum of 80 percent of the price, and it was a straight loan for a maximum term of 5 years. To this day, “residual value” is not part of the Chinese language. Interest rates were high, twice that of a mortgage on a home. About 16 percent of cars sales were on credit after the rules were relaxed in 2004. Did that number improve while the world went on a credit binge? No way: In 2008, the number of cars financed had dwindled to 8 percent. There have been attempts to increase that number as part of the government stimulus package, but to no avail. Consumer credit “traditionally hasn’t been the Chinese way,” says the Wall Street Journal. Quite the opposite:

China has one of the highest savings rates on the planet, on average around a quarter of disposable income. Not just the government, the whole nation sits on a huge pile of hoarded cash. Outgoing US Treasury Secretary Hank Paulson even fingered the conserving attitudes of the Chinese as the root of all evil: “In the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China put downward pressure on yields and risk spread everywhere.” The Chinese ever so politely told him to get a grip.

Currently, some auto-finance companies operate in China, but their loans are expanding very slowly. China’s Chery wants to change that. They have set up an auto finance company in an alliance with a local regional bank, the first domestic carmaker to do so. “All Chery dealers will eventually be prepared to extend loans to car buyers,” Gasgoo writes in amazement that such an outlandish idea might some day become reality. Don’t bank on it.

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28 Comments on “China Busts the Easy Credit Myth...”


  • avatar
    jmo

    The Chinese gov’t is trying to change this. As of right now; “A crisis is growing in China’s pay-as-you-go healthcare system, says the Wall Street Journal. Chinese patients must pay cash upfront or they receive no treatment — even in emergencies.”

    You show up at a Chinese hosptial ED and you need to pay upfront, in cash, for treatment. Hence one of the reasons behind the super high Chinese savings rate.

    The gov’t plan is to institute a social safety net with the goal of reducing the need for Chinese consumers to save so much of their income.

  • avatar
    superbadd75

    China’s way of doing things is incredibly smart. Our lifestyle of finance everything and save nothing has already proven to be extremely dangerous. I’m afraid we haven’t learned anything from current events, and credit is going to continue to be the norm for Americans. Credit issues did start “carmageddon”, job loss and uncertainty has perpetuated it. At least here in America.

  • avatar
    NBK-Boston

    How big as the Chinese market on a per-capita basis?

    If we went back to a cash-up-front car buying model, I’m sure our per capita sales would be about the same as what you see in China.

    Talk about carmageddon!

    Credit isn’t inherently bad. It is, actually, the necessary flip-side of savings in a money-based society. If you earn $100 and spend $60, what do you do with the $40 left over? Put it in a bank — a credit relationship is formed. Invest it in a bond fund? A credit relationship is formed. Keep it in cash under your mattress? You are essentially loaning money to the central bank. You could invest in equities, so a credit relationship is technically not formed, but does that really make a difference? And do you really want your mad money in volatile stocks as opposed to a bank?

    Credit isn’t bad. Stupid credit is bad, and that’s all the difference in the world.

  • avatar
    menno

    I keep saying the Chinese are smart.

    Did you know that a mere two family generations ago, my grandfather worked on a cash basis for everything he ever did?

    He even waited until he’d paid off a farm and built a house before marrying my grandmother, and that took until his late 20’s. She was about 8 years younger than him.

    It’s not such a stupid lifestyle; it will just take multiple miracles (or a total and complete collapse, followed by a total and complete societal rebuild) to accomplish it in this country.

    It’ll also help to have REAL money instead of fiat currency.

    As in silver; gold; copper (small change).

  • avatar
    Tommy

    Isn’t Geithner the SecTreas now?

  • avatar
    ttacfan

    @menno

    Didn’t return to the gold standard triggered the Great Depression?

  • avatar
    radimus

    Wait until the next generation comes of age in China and hits the market with the relaxed credit. They’ll be all over it.

  • avatar
    carlisimo

    I know a lot of people obsess with how great it is to buy everything in cash, but what China needs is a strong internal consumer market. It’s not going to get that anytime soon without some amount of credit spending.

  • avatar
    Wes

    Incoming Treasury Secretary Whom? The Guys name is Geithner, or tax Cheat Geithner.

  • avatar
    yankinwaoz

    “…Even after 2004, one could only finance a maximum of 80 percent of the price, and it was a straight loan for a maximum term of 5 years….”

    I certainly remember when it was this way in the US too. I think it would be smart if we returned to it.

  • avatar
    menno

    No, ttacfan, the gold standard and depression had nothing to do with each other.

    In fact, a few days after taking power, FDR declared by diktat that all Americans WOULD turn in their gold coins for paper money, on penalty of law if not; and then once he did that, he changed the fixed value of gold to screw the public. (He obviously could not read the clear and unambiguous words of the United States Constitution any better than Barack Obama or Bushes or Clinton – you know, “No State shall make any Thing but gold and silver Coin a Tender in Payment of Debts…” (i.e. – money). Article 1, Section 10, U.S. Constitution).

    The depression of 1920 could have been as bad and long as the “great depression” by instead of letting weak companies and banks fall by the wayside in order to let the stronger and better run organizations survive, by 1929, Hoover and then by 1933 FDR, chose the path of Federal intervention to try to reduce the impact of the depression – and actually extended it from 1929 through 1941. Twelve times longer.

    Now, we have the same thought-processes going on in the current administration, only much more so.

    Will this depression last 144 years? Of course not; the nation will collapse before that.

    Having gold, silver and copper coin means that the value of money is actually what you have in-hand; it is not “promises, promises, lies” where the powers-that-be can simply electronically “print up” more money out of thin air (obviously this is what causes what we know as inflation, which is just slow theft/a hidden tax increase by government).

    Literally, no nation on earth has anything but fiat money at this time (fiat money = “promises, promises, lies”).

  • avatar

    Tommy, Wes: It was Paulson, on his last gasp. Fixed.

  • avatar

    I know a lot of people obsess with how great it is to buy everything in cash, but what China needs is a strong internal consumer market. It’s not going to get that anytime soon without some amount of credit spending.

    Carlisimo: China’s retail sales rose 15% in April. And that despite buying a TV set or somesuch on credit would be revolting to a Chinese. The Chinese car market is already the largest in the world and has barely started. Car sales are growing again at a double digit clip. What more do you want? The internal consumer market is healthy, thank you. GDP is still growing, despite a huge crash in exports. The internal demand makes up for it.

    The Chinese Middle Class – which is responsible for a good deal of this spending, is guesstimated at around 80 – 100 million or so, out of a population of around 1.5 billion. This country has barely started.

  • avatar
    Kevin

    So if Americans bought cars at the same rate Chinese do, the U.S. market would see under 2 million new cars sold per year. Which is very little. So I’m not sure what point you’re actually making.

    It’s easy to grow from a base of zero, and China has the advantage in this conversation of being able to grow rapidly as they catch up the frontier of technology and economic productivity, with plenty of help and guidance and foreign technology and processes, without the burden of having to blaze any new trails.

    Further, Chinese are good savers for at least two reasons: the young work long hours 7 days a week and do not have the time and opportunity to spend money. And the slightly older ones are scared that there cannot and will not be a future social safety net in the land of the One Child Policy, so they save like crazy.

    Seems China and the U.S. (and the West) understandably have radically different consumer cultures, not sure what lessons can be expected to transfer across those borders.

  • avatar
    wsn

    superbadd75 :
    May 28th, 2009 at 11:11 am

    China’s way of doing things is incredibly smart.

    ——————————————-

    Actually, no. That’s incredibly stupid.

    Let me give you a very personal explanation. I grew up there up to 17 years old. My parents saved all their lives. And all that saving went poof with inflation.

    If you know anything more than CNN’s last week’s coverage of China, then you would know the Chinese Yuan lost 75% of its value around 1990. Why? Because printing money is the predominate method of tax. (In the US, it’s printing money + payroll tax + property tax)

    Saving money in Chinese Yuan was like buying GM stocks and hold it forever.

    Then, you may ask, if it’s the wrong thing to do, why are people doing it?

    That’s because those people (like my parents) were grown up in an inflation free era (60s~70s). There was not inflation because the state dictates the prices, which resulted in no availability. But anyway, if a person spent his first 30 years of life in that environment, he would be very unlikely to change.

    The younger generations, especially those born after 1980, caught up with reality very quickly and a lot of them burrowed as much loan as possible.

    The lesson is: don’t go against the government. Follow their lead instead.

    If they are dumping/printing their own currency, you should not save. If they are going into deep red, you should burrow too. If you have trouble repaying loans, they will drop the interest rate to zero and bail you out.

  • avatar
    dcdriver

    I used to have a secretary who was single and made about half of what I make in annual salary who “owned” (i.e made monthly payments on) a M-B CLK 500. This car costs twice what my car costs. Her monthly payment must have been outrageous, b/c no chance she put much money down. She also used to pay for lunch every day with a credit card. No wonder our economy is in shambles.

  • avatar
    wsn

    The real reason that “the number of cars financed had dwindled to 8 percent”, I guess, is the impact of the recession.

    Only individuals would finance a car. But as the uncertainty of the US recession hits, many of them would choose not to buy at this time.

    On the other hand, government agencies always pay cash. Now they have even more cash at hand because of the Chinese version of stimulus package. Natural they would want to spend it.

  • avatar
    wsn

    dcdriver :
    May 28th, 2009 at 1:59 pm

    I used to have a secretary who was single and made about half of what I make in annual salary who “owned” (i.e made monthly payments on) a M-B CLK 500. This car costs twice what my car costs. Her monthly payment must have been outrageous, b/c no chance she put much money down. She also used to pay for lunch every day with a credit card. No wonder our economy is in shambles.

    ————————————-

    I don’t think that’s the reason why “our economy is in shambles.”

    On the normal economic course, those who live beyond their means would be gradually “weeded out.” So, after many generations, people will be more an more responsible.

    However, now that they are getting bailed out. The responsible tax payers are getting “weeded out.”

    That is the reason why “our economy is and will be in shambles.”

  • avatar
    Lokkii

    On the normal economic course, those who live beyond their means would be gradually “weeded out.” So, after many generations, people will be more an more responsible.

    However, now that they are getting bailed out. The responsible tax payers are getting “weeded out.”

    We can finance a house for you one day out of bankruptcy. No income verification required!

    That is the reason why “our economy is and will be in shambles.”

  • avatar
    wsn

    Lokkii :
    May 28th, 2009 at 2:15 pm

    We can finance a house for you one day out of bankruptcy. No income verification required!

    ———————————————-

    “We” (as in commercial bank) can finance a house for you one day out of bankruptcy, because we will be bailed out the government when that loan gets into trouble. We either earn interest from you, or we earn bailouts.

    Any one refusing to pay for the tax used for bailout will be dealt with force, literally.

    And we are not kidding.

  • avatar
    wsn

    bluecon :
    May 28th, 2009 at 2:34 pm

    The Chinese have been producing and saving, the west has been spending and borrowing.

    That is why their economy is much better than ours.

    ——————————————-

    Very very few Americans immigrated to China to enjoy their “better” economy.

    On the other hand, many Chinese immigrated here. (Myself to Canada).

    Talk is cheap. Go to China and stay there if you truly meant what you said.

  • avatar
    John Horner

    “It’ll also help to have REAL money instead of fiat currency. As in silver; gold; copper (small change).”

    And where do you expect to find enough precious metals to serve as currency for a real worldwide economy of just under seven billion people and counting? Assigning magical properties to lumps of metal is no more reasonable than paper money.

  • avatar
    agenthex

    The US dollar is likely going to have some real problems. Like hyperinflation.

    The economies that are really going to have problems are the ones without enough central discipline to print now while it’s cheap/less painful, like the EU.

    On the normal economic course, those who live beyond their means would be gradually “weeded out.” So, after many generations, people will be more an more responsible.

    However, now that they are getting bailed out. The responsible tax payers are getting “weeded out.”

    You should write up this excellent research into social evolution.

    The reason immigrants often embrace these crackpot ideals is because they tend to be a self-selective borderline narcissistic group. Unfortunately society tend to behave differently than the simplistic “rational” view.

  • avatar

    Talk is cheap. Go to China and stay there if you truly meant what you said.

    wsn:

    I did. Traded a Park Ave co-op and a house in the Hamptons for a 40th floor duplex in Beijing. I LOVE it here. I’ll definitely stay.

    PS: Speaking of cheap, the fact that the monthly rent for the duplex is less than the Christmas tips for the help at the co-op is appreciated

    agenthex:

    An occasional look at the USD/EUR chart is always educational

  • avatar
    wsn

    John Horner :
    May 28th, 2009 at 8:29 pm

    “It’ll also help to have REAL money instead of fiat currency. As in silver; gold; copper (small change).”

    And where do you expect to find enough precious metals to serve as currency for a real worldwide economy of just under seven billion people and counting? Assigning magical properties to lumps of metal is no more reasonable than paper money.

    ——————————————
    Metals have one magical property: limited quantity.

    Governments cannot “print” gold out of thin air to dilute your holding.

    With paper, all they need to do is add a bunch of zeroes to the end of the number.

    And yes, there will be enough metal for circulation. If some cannot own a pound of gold, they can own a pound of nickel.

  • avatar
    wsn

    Bertel Schmitt :
    May 28th, 2009 at 11:43 pm

    I did. Traded a Park Ave co-op and a house in the Hamptons for a 40th floor duplex in Beijing. I LOVE it here. I’ll definitely stay.

    PS: Speaking of cheap, the fact that the monthly rent for the duplex is less than the Christmas tips for the help at the co-op is appreciated

    ————————————————

    I appreciate this chance to talk to someone who does the opposite what my family did. It’s good to ditch empty talks and get real.

    I personally believe that your good time at China is largely due to the fact you have already made a reasonably large amount of money in the U.S. and then you can enjoy the lower cost of service in China.

    But that won’t last forever. How about your children and grandchildren? Let’s assume that you have 2 children and 4 grandchildren (the number for a stable population). Since they will be born in China and will receive education and training in China, they will likely earn the typical salary of a Chinese university grad. Your estate can only last them for a while. Will they truly be better off in China and not in the US?

  • avatar
    agenthex

    The Unites States is more of an immigrant nation than any other large nation.

    If what you said is true, and unless your are a native Indian, then you are a direct desendant of a self-selective borderline narcissistic group that moved to this land during the 18~20th century.

    Notice I didn’t judge but only describe. If it makes people motivated to be productive, more power to them.


    Crackpot ideals won two world wars, those who stayed in England didn’t.

    High continuous output from geological isolation won those wars. Crackpot ideals tend to be less productive.

  • avatar
    agenthex

    Metals have one magical property: limited quantity.

    Governments cannot “print” gold out of thin air to dilute your holding.

    With paper, all they need to do is add a bunch of zeroes to the end of the number.

    Sure, and with a car you can run into a cement wall and kill yourself, but you don’t.

    A sure sign of a crackpot idea are when the idea’s already been tried everywhere and got abandoned by everybody because it doesn’t work. So my question for the few people who still advocate it: did you not get the memo on why it doesn’t work, or do you think repeating the same steps will lead to different results this time?

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