French automaker PSA Peugeot Citroen will join forces with its Chinese joint venture and a Chinese bank to open a car financing business in the world's fastest-growing car market.
Banque PSA Finance, the automaker's financing arm, will team up with the Dongfeng Peugeot Citroen JV and Bank of China International - a Hong Kong-based investment Bank - to create a car financing JV, said Liu Weidong, president of Dongfeng Peugeot Citroen.
"Bank of China International will control a majority stake in the expected car financing joint venture," Liu told China Daily.
"We expect to clinch a deal within the next two to three months and will apply to the regulators."
If the joint venture is created, PSA Peugeot Citreon is expected to be the first foreign automaker to conduct car financing business in China.
Liu did not reveal the total investment in and the specific equity structure of the new joint venture.
Non-bank auto financing companies in China are required to have assets of at least 4 billion yuan (US$483 million), but some domestic enterprises complain that this criteria is too strict.
The China Banking Regulatory Commission last November approved the preparation of auto financing operations in China by Germany's Volkswagen AG, Toyota Motor Corp of Japan and US General Motors Corp.
The German automaker said its financial arm - Volkswagen Financial Services AG - will start operating in the second half of this year with the establishment of a wholly owned branch in Beijing.
Toyota will also set up a wholly owned car financing branch in China, while General Motors Acceptance Corp - the world's No 1 automaker's financial arm - will form a financing joint venture with local partner Shanghai Automotive Industry Corp.
"We will first focus on wholesale car financing and will provide the service to individuals in the future when a sound social credit system is established in China," Liu said.
Although automakers and commercial banks appear not to be very active in the lucrative business, auto financing does have great potential in China.
"Automakers and commercial banks face risks providing car buyers with loans due to the lack of a sound social credit system and frequent car price cuts in China," said Zhang Xin, an auto analyst at Guotai & Jun'an Securities Co.
At present, less than 20 percent of cars in China are sold with loans, compared with around 70 percent in developed countries.
Car financing generates 60 to 70 percent of the total profits of foreign auto giants, such as General Motors and Ford.
"We applied to regulators at the end of March, but there are great risks in doing car financing business in China now and we should be cautious," said Ford Motor China spokesman Kenneth Hsu.
Ford Credit Company, the world's second biggest automaker's financing division, intends to set up a wholly owned branch in China, which will be named Ford Motor China Financial Co, Hsu said.
Many Chinese insurance companies withdrew from the auto loan insurance business after widespread debt defaults and fraud led to mounting pay-outs mainly resulting from the lack of a sound social credit system.
Auto insurance accounts for more than 60 percent of all property insurance premiums in China.
Non-bank auto financing companies must also have capital adequacy ratios of 10 percent, which is stricter than the 8 percent requirement on commercial banks, according to the commission's regulations.
Total outstanding guaranteed loans must not exceed 200 percent of auto financing companies' registered capital, nor can they offer preferential treatment to related parties.
PSA Peugeot Citroen's car manufacturing joint venture with Dongfeng Motor Corp is producing the Citroen Fukang, Elysee, Picasso and Xsara models, and the Peugeot 307 which was launched last month.
The joint venture, based in Wuhan, the capital of Central China's Hubei Province, plans to sell 150,000 cars this year, up from 100,000 units last year. It also aims to increase sales to 300,000 cars before 2007.
The joint venture plans to introduce a new Citroen or Peugeot model every year from 2004 to 2009.
Sales of China-made vehicles grew by 28.6 percent year-on-year to almost 1.78 million units during the first four months of this year, including 787,200 passenger cars.
(China Daily May 26, 2004)