Could China’s Debt Panic Derail Luxury Car Sales?
Whilst the Western part of the world is mired in recession, news about the free spending ways of Chinese consumers have grabbed headlines across the world in practically every conceivable language. Even while the ‘regular‘ car market is just expanding by 3-5% this year premium auto brands are seeing sales rises of epic proportions; in the first 9 months of this year Audi surpassed its 2010 sales figure of 220,000 vehicles and is on target to hit 300,000 units this year, BMW had a similar story with sales being up 18% in year on year figures in September. So what is driving premium and luxury brand sales? Nobody really knows, macro economic data is easy to pin point for the rest of the market, but the rate of growth in the luxury segment has been unnaturally high for quite some time. One long standing theory is that gray/blac market money is rushing to fill in the gaps, this obviously unregulated side of the market usually funds itself via multiple sources, shortly after the 2008 Economic Crisis the government dumped hundreds of billions in to infrastructure building projects in a bid to prevent the economy from stalling, suddenly luxury car sales picked up. Obviously correlation does not imply causation, but the writing is on the wall.
Elsewhere in the gray market economy, where the government fails to intervene the free market will enter with its own solution. In certain areas such as Wenzhou banks were not entirely eager to give out loans and credit to privately owned enterprises as the government tightened up credit restrictions, enter the loan shark. These loan sharks were not one man bands churning out knee cap finance to the needy, they were pyramid schemes that enabled entire villages to collectively pool money together for loans, towns like Shiji came out on top in the early days:
We have become a BMW town!” wrote one shocked villager on a local internet forum. “In our county, there are now 800 BMWs and 600 Mercedes, 500 Audis, 50 Porsches, 30 Jaguars, one Ferrari, one Lamborghini and one Maserati,” he added.
A forest of cranes had also sprung up around the village, constructing large apartment blocks which advertised themselves with pictures of English butlers and sumptuous, chandelier–lit dining rooms.
Miracles abound in modern China, where countless families have become fabulously wealthy in a single generation. But the dramatic change in Shiji’s fortunes raised eyebrows.
Chinese journalists soon arrived to count the number of BMWs on the roads (10 in 13 minutes, according to CCTV, the state broadcaster).
Then they started asking questions about where the money had come from.
Earlier this month, Shiji’s boom ended as abruptly as it began.
The local Dragon Court BMW dealership has been shuttered; its owner is under house arrest. And as The Daily Telegraph arrived to investigate, jittery local officials were quick to detain us.
“It is not worth looking into too deeply,” cautioned one of them, loading us into the back of a black sedan.
What happened in Shiji is a fraud that plays out every day in some corner of China’s murky economy, as local Communist Party officials and greedy entrepreneurs collude in vast pyramid schemes.
“It all began when a man named Shi Guobao returned to Shiji after working in Beijing,” said Zhu Yi, the head official in the village.
“He became a property developer, but he wanted to make a bigger fortune so he decided to also become a loan shark.” Together with 17 of his friends, Shi began tapping the villagers for their savings, promising to pay them 10 per cent interest each month.
The gang quickly raised 350million yuan, (£35.5million) which they then lent out at rates of 30 per cent or more each month to borrowers including local property developers. Shi became known as “King Claw”, the man at the head of the pyramid.
So where did the 350 million Yuan go? Down the pan it seems. When the loan sharks loaned the cash out, they didn’t realize that China is a vast place and its easy to disappear if you have right connections, or even if you don’t.
when the borrowers started defaulting on King Claw’s loans, the pyramid collapsed. Around 1,700 villagers have complained to the police, some having lost their entire life savings. Two villagers were killed in a mysterious car crash after trying to reclaim their money from one of the loan sharks.
Today, the only luxurious cars left are parked outside the local county government offices and Shi and his 17 friends are either in prison or under house arrest.
Now the bad news is spreading, it seemed to be localized to Wenzhou City in Zhejiang province which was one of the first boom towns to get rich under Deng Xiao Ping’s reform and opening policies in the mid 80′s. Wenzhou’s ideal geographic location gave it a major lead in the early export based economy days, close to the major ports but with a massive pool of labor to build low cost products for the West, but these days its mostly bad news as the pyramid crumbles:
Shanghai economist and columnist for the highly regarded business magazine Caijing, Andy Xie, recently called the state of the banking and loans system, and especially the growth of a black economy of institutionalized loan sharking, “a Ponzi game, relying on new money to pay off the old money.”
“If not checked, this could lead to a national calamity,” Xie wrote.
A convenient spot from which to view what has happened is 2009, when the Beijing government pumped at least $600 billion into the economy to fend off the global recession.
But the four state-owned banks charged with distributing the largesse did not bother to go through the cumbersome business of loaning the money to private enterprises, where it would have had the most benefit for jobs and productivity. Instead, the banks handed out the money to state-owned companies, a relatively easy process that also absolves the banks from responsibility for what happens next.
China’s state-owned enterprises, of course, are not known for their probity, efficiency or even attachment to honesty among the Communist party officials at their helms.
While some of the money went into unnecessary infrastructure such as the shoddily constructed and often lethal “tofu” projects against which Zhu Rongji raged, most of the money was put out in profitable loans and investments from which the party bosses could skim benefits.
Much went into real-estate investment, where returns have been at least 30 per cent in recent years as rural peasants flooding into the cities kept the bubble inflated.
Faced with a slow economic death, it has become common in China’s eastern and southern “Gold Coast” industrial regions for bosses of private companies to disappear overnight.
Those private entrepreneurs who try to hang on have been driven more and more into the arms of a burgeoning underground banking system whose interest rates can be as high as 100 per cent and which Chinese authorities reckon is worth about $1.5 trillion.
Forget the shiny stereotype that middle to upper middle class city slickers are buying premium brands, the real buyers are in second tier cities such as Wenzhou, Shenzhen, Foshan, Guangzhou and beyond, where there is industry there are bosses buying cars to boost their image, but as the cookie starts to crumble we could potentially see a mild drop in luxury car sales over the next few months if the Central Government does not step in to correct the situation, although with the credit issue spreading to neighboring provinces, is it all a little too late?
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Last year I saw a car that had a sign on it saying if you can’t get a car loan call me. I am assuming it was a private loan deal similar.
For those interested, some related articles from Caixin:
Cash Crash for Wenzhou’s Private Loan Network
http://english.caixin.cn/2011-10-11/100312830.html
Ordos Property Developer Commits Suicide
http://english.caixin.cn/2011-10-14/100314297.html
Underground Rumblings, then a Financial Quake
http://english.caixin.cn/2011-10-14/100314091.html
Excellent stuff. Caixin really is a great website that doesn’t nearly get enough of my time!