Beijing scrutinising US$43b pawnshop lending boom

Shanghai

THESE are not the small-dollar lending, used-guitar selling pawnbrokers of middle America.

In China, pawnshops have evolved into big shadow finance industry players - lending the equivalent of US$43 billion in 2017, often to small businesses and at much higher interest rates than banks. The number of Chinese pawnshops has doubled since 2010 to more than 8,500 and their average loan size exceeds US$26,000, versus around US$100 in the US.

Now, that breakneck growth is putting pawnshops in the Chinese government's crosshairs. The country's banking and insurance regulator is drafting new rules that will toughen oversight of the industry, people familiar with the matter said, asking not to be identified as the matter is private.

The move will target one of the last untouched corners of China's US$9 trillion shadow banking sector, broadening a more than two-year government effort to reduce financial risk in Asia's largest economy. It suggests that the authorities aren't finished with their cleanup campaign, despite recent signs that they've dialled back deleveraging measures elsewhere to support economic growth.

The China Banking and Insurance Regulatory Commission's inclusive financing division is drafting the new rules after taking over jurisdiction of pawnshops from the Ministry of Commerce last year, the people said. One of the rules may increase the minimum capital requirement for pawnshops from its current level of three million yuan (S$606,560), the people said. While CBIRC oversees the industry, local governments will handle day-to-day supervision, they said, an approach used for peer-to-peer lenders.

Unlike other countries, China's pawnshops are often used by small business owners to access high-cost funds for working capital. More than half of pawnshop loans extended in 2017 were backed by real estate. And unlike typical bank loans, borrowers don't need to disclose how the money will be used.

More than a third of China's pawnshops were loss-making in the first two months of 2018 and their overdue loan ratio exceeded 13 per cent amid rising competition with online lenders, official data show. Shares of Sunny Loan Top Co and Changsha Tongcheng Holdings Co, two China-listed companies that invest in pawnshops, have dropped more than 20 per cent over the past three years even as the Shanghai Composite Index gained.

In recent years, some outlets have expanded to accept stocks and accounts receivables as collateral, in addition to luxury watches, jewellery, automobiles and properties. To supplement their own capital and increase their capacity to lend, pawnshops have also borrowed from banks.

A typical loan in Shanghai comes with an interest rate of about 2 per cent a month, or 24 per cent annually, compared with the benchmark one-year lending rate of 4.35 per cent. Pawnshops will typically lend up to 40 per cent of the value of an apartment pledged as collateral, renewing the loan every six months.

A recent court case in Beijing showed how large such sums can get. The dispute involved a three-month, 4.35 million yuan property-backed loan with a 30 per cent annualised interest rate. The borrower ultimately defaulted. BLOOMBERG