There’s no subprime bubble in Chinese auto industry loans

Slowing car sales and tightening credit look like a toxic combination for China’s auto-financing industry, which has exploded in past few years. Concerns the sector is heading for a subprime-like meltdown may be overblown, though.
Sales in the world’s largest car market rose 2.3 percent in June from a year earlier, data showed last week. While faster than several analysts expected, growth decelerated from an 8 percent pace in May. Compared with the previous month, deliveries fell about 1 percent in June.
The cooling coincides with Beijing’s quest to deleverage the financial system, which has led to tighter liquidity, reduced access to credit and, in theory, sq- ueezed consumer discretionary spending. In a report last week, analysts at Sanford C. Bernstein linked the weakness in car sales to a slowdown in peer-to-peer lending, pointing to “the deflation of what amounts to a subprime (P2P) auto bubble.”
The relationship between car sales and credit in China is less clear than in other countries.
Like all forms of debt in the world’s second-largest economy, car loans have expanded rapidly. About 40 percent of the annual 4 trillion yuan ($600 billion) of auto retail sales are financed, a penetration rate that’s more than tripled from 12 percent in 2011. But that’s still low compared with a global average of 70 percent and the US rate of about 80 percent.
China’s car loans are concentrated in higher-end or luxury vehicles, accounting for about 45 percent of sales versus 34 percent for mid-range models, according to research firm J.D. Power. More than half of BMW AG’s sales in China are on credit, for instance, according to Goldman Sachs Group Inc.
A majority of loans in the 1.4 trillion yuan market are made by carmakers’ captive finance companies, with dealers and banks accounting for most of the rest. These units pack loans into asset-backed securities, issuance of which totalled 16 billion yuan in Q1. The delinquency rate was around 0.1 percent, despite higher interest rates.
Other channels such as P2P lenders account for a much sma-ller portion. As of June, loans from these online platforms totaled about 17 billion yuan, or 9.4 percent of broader internet lending industry, according to P2P lending data site wdzj.com. Much of that was concentrated in the eastern province of Zhejiang, a relatively wealthy area.
Chinese auto-financing products tend to have lower loan-to-value ratios and shorter terms than in other mature markets, creating a buffer against defaults. Financing has higher margins, meanwhile, generating about 20 percent of operating profits for some companies while accounting for less than 2 percent of revenue.
Car buyers may start to default in greater numbers eventually, but even if delinquency rates do spike, there’s less risk of a self-feeding spiral such as the one that triggered the US subprime mortgage crisis a decade ago.

— Bloomberg

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal