A new regulation governing personal auto financing is to be worked out very soon by China's central bank, the People's Bank of China (PBOC), to streamline the fast-growing, yet ill-fated, auto-financing market.

The move is being billed as another landmark decision by regulators to root out problem lending and build up a healthy financial system.

Regulators last month released a regulation aimed at restricting lending in the overheated housing-financing sector.

Designed to replace rules enacted five years ago, the new regulations, with the much-planned rule to manage auto-financing firms, will form the legal framework to shore up China's auto-financing market.

But the rules to manage auto-financing firms will be released by the China Banking Regulatory Commission (CBRC) - a newly established banking watchdog following a split from PBOC earlier this year.

The new rules could be released within three months, suggest source with CBRC's information office.

"And we will tie up with CBRC for detailed consulting and reviewing of these two provisions before an official release," echoed sources with PBOC's information office.

But the source declined to unveil further details of the planned provision.

The new regulation will focus more on individual auto consumption, the pillar of car sales in China's fast-growing market, and on the amount a customer can borrow, which will be determined by his/her credit history.

Although auto sales have soared in recent years, China's auto-financing business has failed to mature.

Commercial banks have tried to boost the sector, without a sound system to ward off risks.

"Auto loans are riskier than mortgages, as China still does not have a qualified personal credit management system," said Yi Xianrong, a financial expert with the Chinese Academy of Social Sciences.

Chinese had borrowed 94.5 billion yuan (US$11.41 billion) by the end of last year to buy vehicles.

Of that amount, loans with State-owned banks hit 80 billion yuan (US$9.66 billion), while shareholding and smaller banks issued 12 billion yuan (US$1.44 billion). Finance companies issued the remaining loans.

China's situation is different from practices in mature western markets, where a larger number of auto sales are financed by specialized auto-financing firms.

Currently, less than 20 per cent of car sales in China are financed, much less than the average 70 per cent in Western countries.

That will change as more Chinese become aware of personal lending, and as vehicle sales in China continue to soar.

Car sales in China last year reached 1.2 million units. In all, 3.25 million vehicles - including trucks and buses - were sold across China, up 36.65 per cent year-on-year. Car sales could jump to 1.8 million units this year, fuelled by price cuts and the introduction of more foreign models.

Currently, property insurance firms in China bear the burden for auto loan risks. Many insurers, however, have abandoned the business due to high risks.

Research by China Minsheng Bank indicates about 30 per cent of auto loans become problem loans, a ratio that is even higher than that of housing loans, which could pose threat to the country's fragile financial system.

However, with the debut last October of the draft management principles for auto financing, China's auto sellers will promote auto lending, and some, if not properly supervised, might resort to ill-fated competition by lowering the minimum down payment to boost their sales.

Yi has been calling for the quick implementation of the new regulations to replace the Management Rules for Auto Consumption enacted in 1998. The current regulations only govern financing of Chinese-made vehicles issued by the nation's four largest State-owned banks.

"Apart from the release of the new regulations, large foreign auto financing firms, such as Ford and General Motors, should be also introduced to the market, which could, in turn, streamline the market," Yi said.

(Business Weekly July 14, 2003)