When car loans add up for buyers
By Zhang Fengming |
May 14, 2010, Friday
|
Print Edition
Print Edition
Jessie Yuan, a 29-year-old white-collar worker in Shanghai, loves owning a car, even though it meant going into debt.
"I had to get a loan from the bank because I really wanted to buy a car but didn't have enough cash on hand," Yuan said. "My whole life has totally changed since I've been on the road."
Yuan, who works for a Fortune 500 multinational company, exemplifies the rising, youthful middle class of urban China: good education, good job and not bound by the pay-as-you-go ethic of her parents' generation. In short, the upwardly mobile young people of today aren't righteous savers.
Yuan earns 16,000 yuan (US$2,343) a month, well above the average monthly Shanghai salary of 3,566 yuan last year.
She bought a Peugeot 307 for 110,000 yuan, financed by a two-year loan with monthly payments of 2,500 yuan. The loan carries interest of about 200 yuan a month.
Young people like Yuan are called "moonlighters" in China - the legacies of China's one-child policy who are now aged 30 or younger and are seen as more self-indulgent and Western-oriented than generations before them.
Moonlight, which bears the same Chinese pronunciation as using up a monthly salary, is a term coined to name the group.
"For moonlighters like me, buying a car with a loan is the best option," Yuan said. "The interest payments don't hurt my daily expenditures, so I can enjoy a life on wheels without any hardship."
Lots of Yuan's peers are making the same choices where debt is concerned. Owning a car is viewed as a necessity by young people who have been forced into the outer suburbs by soaring housing prices and don't want to endure the overcrowding and long commute times on public transport after a tiring day at work.
And for those who have been priced out of the property market altogether, buying a car is a nice consolation prize, especially since vehicle prices are dropping.
New home prices jumped to a record in Shanghai in April despite a series of government-imposed restraints meant to curb excess speculation in property.
The average prices of new homes, excluding those designated for relocated residents under urban-redevelopment plans, climbed 16 percent from March to 22,926 yuan per square meter, according to Shanghai Uwin Real Estate Information Services Co.
The auto market is suffering the opposite fate. As more cars pour into showrooms and competition heats up, prices are dropping. Lenders forced by the government to cool mortgage loans are finding other ways to profit through car loans.
In April, banks in Shanghai extended 1.2 billion yuan of auto loans, double the rate of a year earlier. In China, owning a car has become a status symbol of success, unlocking a freedom of travel that earlier generations could not have imagined.
The China Association of Automobile Manufacturers said vehicle sales between January and April surged 61 percent from a year earlier to 6.2 million units.
China has surpassed the United States as the world's biggest auto market, with sales of 13.6 million vehicles last year alone. This year growth is expected to slow to 15 percent, or 15 million cars sold.
China's economic stimulus program is propping up the auto industry. Last year, the government halved the tax to 5 percent on vehicles equipped with 1.6-liter or smaller engines. It also provided subsidy incentives for people who trade in older cars for more fuel-efficient new ones.
This year, the purchase tax was raised to 7.5 percent but still remains 2.5 percentage points below the tax on bigger cars. At the same time, China raised the subsidy for people trading in old cars for new to as much as 18,000 yuan from last year's level of 6,000 yuan.
Volkswagen, BMW and Mercedes-Benz, among other manufacturers in China, reported strong first-quarter sales. Car makers across the spectrum are turning out more and more models to try to entice more consumers behind the wheel. The blitz caught everyone's eye at the recent China Auto Show in Beijing.
For Yuan and her contemporaries, it's easy to secure a loan to buy anything from a 100,000 yuan Peugeot to a more than 1 million yuan Land Rover.
But is anyone thinking back just six years? Cars have one striking difference from property. They begin to depreciate the minute an owner first slips into the driver's seat, and they never regain their initial value.
Six years ago, faced by that stark reality, many of China's new auto owners stopped making their loan payments. Banks caught with rising non-performing debt stopped issuing car loans, and the auto industry languished.
Shenzhen Development Bank, a joint-stock lender, bucked the trend. It stayed in the market and has borne the fruits of its decision in the new wave of auto loans.
The medium-sized bank, based in the southern boom city of Shenzhen, extended 6 billion yuan of individual auto loans in 2009, up 180 percent from a year earlier. Its bad-loan ratio has remained at a steady and enviable 0.2 percent.
Shenzhen Development has teamed up with more than 1,300 dealer stores nationwide to offer auto loans.
"Some people thought auto loans bore higher risks than home loans because autos are a depreciating asset," said Zhao Jiong of Shenzhen Development Bank. "But that's not true. Auto loans don't necessarily carry higher risk. What counts most for us it to make sure that our lending is prudent."
While banks are beefing up their risk controls, auto owners are also becoming more aware of how important it is to maintain a good personal credit rating.
Yuan said she has no plans to default on her auto loan and will pay the money back on time.
And she's the face of New China that bankers like Zhao are happy to see.
"I had to get a loan from the bank because I really wanted to buy a car but didn't have enough cash on hand," Yuan said. "My whole life has totally changed since I've been on the road."
Yuan, who works for a Fortune 500 multinational company, exemplifies the rising, youthful middle class of urban China: good education, good job and not bound by the pay-as-you-go ethic of her parents' generation. In short, the upwardly mobile young people of today aren't righteous savers.
Yuan earns 16,000 yuan (US$2,343) a month, well above the average monthly Shanghai salary of 3,566 yuan last year.
She bought a Peugeot 307 for 110,000 yuan, financed by a two-year loan with monthly payments of 2,500 yuan. The loan carries interest of about 200 yuan a month.
Young people like Yuan are called "moonlighters" in China - the legacies of China's one-child policy who are now aged 30 or younger and are seen as more self-indulgent and Western-oriented than generations before them.
Moonlight, which bears the same Chinese pronunciation as using up a monthly salary, is a term coined to name the group.
"For moonlighters like me, buying a car with a loan is the best option," Yuan said. "The interest payments don't hurt my daily expenditures, so I can enjoy a life on wheels without any hardship."
Lots of Yuan's peers are making the same choices where debt is concerned. Owning a car is viewed as a necessity by young people who have been forced into the outer suburbs by soaring housing prices and don't want to endure the overcrowding and long commute times on public transport after a tiring day at work.
And for those who have been priced out of the property market altogether, buying a car is a nice consolation prize, especially since vehicle prices are dropping.
New home prices jumped to a record in Shanghai in April despite a series of government-imposed restraints meant to curb excess speculation in property.
The average prices of new homes, excluding those designated for relocated residents under urban-redevelopment plans, climbed 16 percent from March to 22,926 yuan per square meter, according to Shanghai Uwin Real Estate Information Services Co.
The auto market is suffering the opposite fate. As more cars pour into showrooms and competition heats up, prices are dropping. Lenders forced by the government to cool mortgage loans are finding other ways to profit through car loans.
In April, banks in Shanghai extended 1.2 billion yuan of auto loans, double the rate of a year earlier. In China, owning a car has become a status symbol of success, unlocking a freedom of travel that earlier generations could not have imagined.
The China Association of Automobile Manufacturers said vehicle sales between January and April surged 61 percent from a year earlier to 6.2 million units.
China has surpassed the United States as the world's biggest auto market, with sales of 13.6 million vehicles last year alone. This year growth is expected to slow to 15 percent, or 15 million cars sold.
China's economic stimulus program is propping up the auto industry. Last year, the government halved the tax to 5 percent on vehicles equipped with 1.6-liter or smaller engines. It also provided subsidy incentives for people who trade in older cars for more fuel-efficient new ones.
This year, the purchase tax was raised to 7.5 percent but still remains 2.5 percentage points below the tax on bigger cars. At the same time, China raised the subsidy for people trading in old cars for new to as much as 18,000 yuan from last year's level of 6,000 yuan.
Volkswagen, BMW and Mercedes-Benz, among other manufacturers in China, reported strong first-quarter sales. Car makers across the spectrum are turning out more and more models to try to entice more consumers behind the wheel. The blitz caught everyone's eye at the recent China Auto Show in Beijing.
For Yuan and her contemporaries, it's easy to secure a loan to buy anything from a 100,000 yuan Peugeot to a more than 1 million yuan Land Rover.
But is anyone thinking back just six years? Cars have one striking difference from property. They begin to depreciate the minute an owner first slips into the driver's seat, and they never regain their initial value.
Six years ago, faced by that stark reality, many of China's new auto owners stopped making their loan payments. Banks caught with rising non-performing debt stopped issuing car loans, and the auto industry languished.
Shenzhen Development Bank, a joint-stock lender, bucked the trend. It stayed in the market and has borne the fruits of its decision in the new wave of auto loans.
The medium-sized bank, based in the southern boom city of Shenzhen, extended 6 billion yuan of individual auto loans in 2009, up 180 percent from a year earlier. Its bad-loan ratio has remained at a steady and enviable 0.2 percent.
Shenzhen Development has teamed up with more than 1,300 dealer stores nationwide to offer auto loans.
"Some people thought auto loans bore higher risks than home loans because autos are a depreciating asset," said Zhao Jiong of Shenzhen Development Bank. "But that's not true. Auto loans don't necessarily carry higher risk. What counts most for us it to make sure that our lending is prudent."
While banks are beefing up their risk controls, auto owners are also becoming more aware of how important it is to maintain a good personal credit rating.
Yuan said she has no plans to default on her auto loan and will pay the money back on time.
And she's the face of New China that bankers like Zhao are happy to see.
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