China considers tightening rules for $43b pawn-shop lending sector

Pedestrians walk past a pawnshop in Macau, China, on Saturday, Aug. 29, 2015. Macau is scheduled to release second-quarter gross domestic product figures Aug. 31. Photographer: Jerome Favre/Bloomberg

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

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

Now, that breakneck growth is putting pawn shops 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 $9 trillion shadow-banking sector, broadening a more than two-year government effort to reduce financial risk in Asia’s largest economy. It suggests authorities aren’t finished with their cleanup campaign, despite recent signs that they’ve dialed back deleveraging measures elsewhere to support economic growth.

The China Banking and Insurance Regulatory Commission’s (CBIRC) inclusive financing division is drafting the new rules after taking over jurisdiction of pawn shops from the Ministry of Commerce last year, the people said. One of the rules may increase the minimum capital requirement for pawn shops from its current level of 3 million yuan, 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.

CBIRC didn’t immediately reply to a fax seeking comment.

Unlike other countries, China’s pawn shops are often used by small-business owners to access high-cost funds for working capital. More than half of pawn-shop 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 pawn shops were loss-making in the first two months of 2018 and their overdue loan ratio exceeded 13 percent 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 pawn shops, have dropped more than 20 percent 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, jewelry, automobiles and properties. To supplement their own capital and increase their capacity to lend, pawn shops have also borrowed from banks.

A typical loan in Shanghai comes with an interest rate of about 2 percent a month, or 24 percent annually, compared with the benchmark one-year lending rate of 4.35 percent. Pawn shops will typically lend up to 40 percent 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 ($648,000) property-backed loan with a 30 percent annualized interest rate. The borrower ultimately defaulted.

Also read:

Chinese P2P lender Dianrong to shut down 60 stores, lay off 2,000 employees

Mekong Capital-backed pawn shop chain F88 raises new round from Granite Oak

Bloomberg

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

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  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.