China Busts the Easy Credit Myth

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.