In accordance with data disclosed by relevant sources, bad assets resulted from automobile loans had already amounted to RMB15 billion yuan in 2005 in Beijing.

Since Shanghai Automotive Industry Corporation took the lead to launch loans for automobile consumption jointly with domestic financial institutions in 1995, domestic car loans have come into existence for 12 years. In 2002, car loans entered into a period of rapid growth and arrived at the climax in 2003. However, the excessively granted car loans and various nonstandard operations resulted in substantial losses for the banking industry and the insurance industry. In 2004, car loans were peremptorily terminated in many cities and banks either withdrew from car loan operations or raised the doorsill for car loans. As a result, car loans turned from a period of "blowout" into a low tide.

Certain insiders in the banking industry noted that it would took time to expose bad car loans; as the recent years form a period to pay back car loans collectively, bad assets incurred by automobile consumption loans, which were exposed now, were mostly produced several years ago.

Unsound individual credit system and insufficient acceptance of the credit consumption concept are regarded by experts as two primary reasons for the failure. Incomplete or inaccurate basic information and credit information of individuals have directly influenced loan banks' evaluation of individuals' loan credit and increased risks on car loans.
Malicious escape from automobile consumption loans is also one of the important reasons that resulted in bad loans.

In June 2006, the People's Court of Haidian District, Beijing proposed in a judicial proposal submitted to China Banking Regulatory Commission that banks lose repeatedly in lawsuits concerning paying back car loans and the Court found out during hearing such lawsuits that there existed severe weak points in banks' checkups on loan business. The Court believed that it was a major reason for problems to occur that banks and automobile distributors failed to audit borrowers' credit strictly and were devoid of restrictions on risk responsibility.

As forecast by experts from China Association of Automobile Manufacturers, the sales volume of cars in the domestic market will break through seven million sets with a strong growth impetus in 2006; such an estimation means that there exists a highly potential market of automobile consumption credit. In countries where the automobile industry is developed, 70 percent of cars are bought on basis of credit on average and only 30 percent of cars are bought in cash. The proportion of purchasing cars on individual credit is the highest in the USA and amounts to 80 to 85 percent while that in Japan amounts to 60 percent.

In August 2004, GMAC-SAIC Automotive Finance Company, Ltd. was set up in Shanghai when China's car loan market was in depression. By the end of August 2006, the company had lent out nearly 30,000 retail loans. Following the example of General Motor, automotive finance companies of Volkswagen, Ford, Toyota, and Daimler Chrysler came one after another. In 2006, both Dongfeng Citro?n and Beijing Hyundai Co., Ltd. entered into the car loan market in a new style of cooperation by directly setting up respective joint ventures with domestic financial institutions.

For the moment, the establishment of altogether seven automotive finance companies has been approved in China. At the same time, there are over 60 foreign-funded banks doing businesses in China according to the agreements that China had signed at its entry into the WTO; it is sure that they will not neglect the substantially profitable automotive finance business.

Domestic financial institutions have begun to respond to the upcoming competition in the market. As to bad loans having come into existence, various banks have begun to rely on legal measures to vindicate their legal rights and interests in case that mediation is ineffective and seek to get back those "cars bought by people trying to escape from loans" according to laws. Insiders in the banking industry said that banks had optimized a number of procedures for automobile consumption loans and set up effective contacts with their clients while having reinforced their supervision on loans lent out.

Domestic financial institutions are also designing for new competitions. In October 2006, Bank of China put forth "Favorable Car Loans"; such loans will cut down the down payment for a car bought on loans from 30 percent of the car price to 20 percent and offer a favorable interest rate, equivalent to 90 percent of the interest rate for loans in the same term, to loan borrowers with a good prestige while the longest loan term will be prolonged from 3 years to five years. As far as mortgage modes are concerned, individuals who have already applied for house loans in Bank of China or have deposits in Bank of China can mortgage their respective houses or certificates of deposit. Banks have cut down risks of bad debts by binding guaranties.

In the automobile consumption credit market where it was dreary in about two years, various parties have taken actions frequently in 2006. A competition between domestic funds and overseas funds in the car loan market is in the womb of time. The market is the best teacher and financial institutions that "have gained some wits from a fall into a pit" should be more confident in face of competition.

Editor: Yan