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Monday, September 15, 2003

China: The Price of Credit

After a week of arguing the toss with Conrad the Gweilo and Richard the Peking Duck about the reality, or ir-reality, of the Chinese growth phenomenon, I need some relief. Now both Conrad and Richard are confirmed China growth skeptics. I am not, but this doesn't mean accepting the official numbers at face value, far from it. It doesn't mean swallowing uncritically all the hype, either. In this sense Shanghai-based journalist Fons Tuinstra is a nice anti-dote. His humour and quiet irony put a very different gloss on things:

This is going to be one of these rather nasty "didn't I tell you" pieces, so you can still focus on more important things, before I annoy the hell out of you. Last week Daimler-Benz was one of the last global car makers to join with a whoppy 1.1 billion US dollar the car frenzy in China. They must have missed my first piece on the issue, I guess. Since everybody is here now, it is time for the countdown and see who is the first one to leave again.

It is quite obvious that the automotive market in China can never grow fast enough to take up all the cars the automotive industry can produce in two or three year's time when all their newly build production units are up and running. It might take at least ten to fifteens years before China can compete on a global market, now even cars from expensive Japan can still compete with the Chinese. The export is not going to be a way out. So, you do not need to be much of a clairvoyant to see here the upcoming destruction of a lot of good capital. That in itself is a good thing. In the past the world needed wars and physical destruction to bomb themselves into another economic boom. I rather enjoy the Chinese style of capital destruction, which comes along with massive banquets in stead of bombers.

What is harder to predict is how, when and where death and destruction will hit the car industry. James Areddy of Dow Jones wrote this week a piece with some of the early signs of the upcoming collapse. Insurers are withdrawing from the car loan business in China, he wrote, because Chinese car users do not pay back loans. These are only early signs, since the auto loans business is only two years old. People did not have many chances to default. The business was 4 billion US dollar in the first half of this year, and much of it is not returning. Anecdotic evidence from Wuxi showed that the claims the insurers had to pay almost equaled the premiums they would get in.

Some of the arguments being used in the article are so mind-boggling, you wonder why anybody is still eager to go in financial services at all. Problem for the car loans is that there is no credit information on individuals available. Shanghai has started a smaller initiative to register financial information on lenders, but mostly defaulters can easy get new loans - often they do. "The problem of this business is that it is too costly to get individual credit information," said an expert of one of China's largest insurers. Because prices of cars are falling so fast, owners would just leave the car and get a new one - with a new loan of course. Nobody is collecting credit information on individuals in China because it is too expensive! That is almost a death verdict for all individual loans. We knew of course that loans to corporations do not fare much better. You wonder why all these foreign financial institutions are so eager to lose their capital?
Source: ChinaBiz

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