作者：栾剑琦 黄建贤 王珏 易忠云 金杜律师事务所金融资本部

Given recent innovations in Chinese residents’ consumption concepts and the support of national policies, auto finance and consumer finance have both achieved relatively rapid growth. On 11 April, PBOC Governor Yi Gang (易纲) announced at the Boao Forum for Asia various financial liberalization measures to be launched this year, including encouraging the introduction of foreign investment in financial sectors such as auto finance and consumer finance. This move may bring new opportunities for development for the auto finance and consumer finance industries. This article will review the development history of auto/ consumer finance companies and the status quo of foreign investment access and, based on our experience, analyze the opportunities the current opening-up of the financial market may bring to foreign investors as well as the regulatory requirements foreign investors should pay special attention to when investing in these two types of companies.

Market Positioning and Review of Development History

Auto finance companies are the combination of auto manufacture and finance, and an extension of traditional automobile manufacturers to the financial sector through the industrial chain. Most auto finance companies, which are affiliated to auto manufacturing groups, mainly provide loans to dealers and end consumers of branded vehicles offered by the group (the loans include, but are not limited to, inventory auto loans to dealers and retail auto loans to consumers). The financial services cover all aspects of the automotive industrial chain.

Consumer finance companies, which are newer to the Chinese market compared with auto finance companies, refer to non-banking financial institutions that provide personal consumption loans (excluding purchase of real property and automobiles), in particular small, decentralized loans for the purpose of household consumption. More than 90 percent of the consumer finance companies established so far are backed by banks. Their shareholders also include traditional retailers and trading companies.

Foreign Investors’ Participation in the Market

A large percentage of the auto finance companies established so far are Sino-foreign joint ventures. We noticed that the shareholders of such joint ventures usually have set up joint ventures in automobile manufacturing prior to launching an auto finance company. Although there are no laws, regulations, or policies imposing restrictions on foreign investment into auto finance companies, we understand that to a certain extent, this phenomenon reflects regulatory authorities’ willingness to see Sino-foreign joint ventures expanding from the automobile manufacturing industry to the financial industry and achieving all-round, multi-level cooperation.

According to our observation of the market, currently, the proportion of foreign capital in consumer finance companies is far lower than that in auto finance companies; moreover, there is only one wholly foreign-owned consumer finance company in the market, namely Home Credit Consumer Finance Co., Ltd. (HCCFC). The only shareholder of HCCFC, Home Credit B.V., is a well-known overseas consumer financial service provider. We understand that HCCFC is one of the first four pilot consumer finance companies set up in China, which reflected the supervisory authorities’ willingness to bring in foreign experience in the field of consumer finance. However, most of the consumer finance companies established later on are domestic-funded companies or Sino-foreign joint ventures with the PRC incorporated enterprises being the main contributor. This to a certain extent reflects a more cautious stance by regulators on foreign investor’s participation in consumer finance companies.

Opportunities for Foreign Investors Access

With the substantial increase in domestic consumption demand and the innovative models including the “Internet Plus,” the auto and consumer finance markets have gathered momentum and come up with better risk control methods, more customer acquisition channels, and diverse consumption scenarios. Further encouraging the opening-up of the auto and consumer finance markets to foreign investment would help domestic auto and consumer finance companies to obtain foreign capital to enhance their capital strength and competitiveness and to better meet regulatory requirements and the need of rapid business development. Additionally, it would facilitate the introduction of advanced experience in corporate governance, risk control, and management from the international financial market, so as to promote the orderly and steady development of the auto and consumer finance industries. From the viewpoint of foreign investors, expanding foreign investment in China’s auto and consumer finance sector would present new opportunities for foreign investors to gain greater market shares and higher profits in the rapidly developing China’s auto and consumer finance markets. The measures for opening up the auto and consumer finance sectors to the foreign investors are being developed in view of such internal and external demands.

According to the timetable announced by POBC Governor Yi Gang, the opening-up measures that encourage the introduction of foreign investment in financial sectors such as auto finance and consumer finance would be launched before the end of 2018. Although specific opening-up measures have not yet been enacted, restrictions on the qualifications of overseas investor and on the upper limit for the percentage of foreign shareholding may loosen up further. As measures to expand foreign participation were launched at the national level, we noticed that various local financial administrative departments were also actively implementing relevant measures. According to a recent briefing by the head of the Shanghai Municipal Office of Finance Service on expanding the opening-up of the financial industry to the outside world, Shanghai has formed measures for pilot opening-up to the foreign investors from six aspects in accordance with the measures announced by POBC Governor Yi Gang and have combed through and a batch of financial opening-up projects to report to the national financial administrative department. In terms of consumer finance, the head of the Shanghai Municipal Office of Finance Service revealed that a French bank has signed an investment agreement with a state-owned group in Shanghai, planning to jointly set up a consumer finance company in Shanghai. The application materials have been submitted to the regulatory authority, which has already provided counseling. This will mark the first consumer finance company set up in China by investors from the developed countries in Europe/United States[1].

The opening-up of the financial market to the foreign investors has begun in 2018, and foreign investors will enjoy new opportunities in the areas of auto finance and consumer finance. However, as specific rules are not yet in place, it remains to be seen how the opening-up measures will be implemented and how the details of practical operation will keep in line with existing laws and regulations such as the Administrative Measures for Auto Finance Companies, the Administrative Measures for Pilot Consumer Finance Companies, and the Measures for the Administration of Foreign Financial Institutions Investing in Chinese-Funded Financial Institutions (the Measures).

Supervisory Requirements That Foreign Investors Should Note

Under the current regulatory framework, foreign investors investing in auto and consumer finance companies should pay special attention to the following regulatory requirements:

  • Establishment process: Auto and consumer finance companies are now regulated by the China Banking and Insurance Regulatory Commission (the CBIRC, formerly the China Banking Regulatory Commission). In terms of regulation on the establishment of institutions, the supervision on consumer finance companies, which emerged after auto finance companies, learned a lot from the experience in regulating auto finance companies. These two types of companies are subject to similar industry access and establishment procedures. The process for setting up an auto or consumer finance company is as follows:

  • Qualification requirements for shareholders: The Administrative Measures for Auto Finance Companies, the Administrative Measures for Pilot Consumer Finance Companies and other relevant laws and regulations now in force impose no direct restrictions on the domestic or foreign capital composition of the shareholders of auto and consumer finance companies. Qualified domestic and foreign institutions alike can participate in the establishment of auto and consumer finance companies as shareholders. According to these laws and regulations, regulatory authority will focus on reviewing the financial indicators of the investors of auto or consumer finance companies, including an investor’s operating income for the past one year, its total asset/net asset by the end of the year, its profitability, as well as its legal compliance. At the same time, we noticed that at the regulatory level, foreign investors in auto finance companies are subject to less additional requirements and enjoy wider access compared with foreign investors in consumer finance companies (for instance, for an overseas financial institution to be a shareholder of a consumer finance company, the country or region where it is located should have established a sound cooperation mechanism with the CBIRC in terms of supervision and management, which is not required for overseas investors of auto finance companies.)

According to the Administrative Measures for Auto Finance Companies and the Implementation Measures for Administrative Licensing Issues of Non-Banking Financial Institutions, investors of auto finance companies shall meet the following requirements; additionally, the main investor must be a company that manufactures or sells complete vehicles or a non-banking financial institution.

The aforementioned laws and regulations impose no special restriction on the qualifications of overseas enterprises that are investors of auto finance companies. However, if an overseas institution applies to be a shareholder of an auto finance company, its preparatory application materials need to meet the additional requirements set out below:

  • For overseas non-banking financial institutions supervised by financial regulators at places where they are incorporated in to become foreign investors of auto finance companies, the institutions shall provide written opinions issued by such financial regulators that include such institutions’ legal compliance records over the past two years and whether such regulators consent to such institutions’ plans to establish auto finance companies in China;
  • Overseas investors not supervised by financial regulators at places where they are incorporated in shall offer credit rating reports on their performance over the past two years by international rating agencies approved by the CBIRC.

Shareholders of consumer finance companies face different regulatory requirements on their types and qualifications compared with contributors of auto finance companies. According to the Administrative Measures for Pilot Consumer Finance Companies and the Implementation Measures for Administrative Licensing Issues of Non-Banking Financial Institutions, investors of consumer finance companies shall meet the following requirements; additionally, the main contributors shall be domestic or foreign financial institutions or domestic non-financial enterprises whose primary business is providing consumer loans.

Similar to auto finance companies, overseas investor of consumer finance companies need to meet additional requirements set out below when preparing their application materials:

  • Overseas financial institutions shall provide written opinions issued by financial regulators at places where they are incorporated in, which shall include such institutions’ legal compliance records over the past two years and whether such regulators consent to such institutions’ plans to establish consumer finance companies in China;
  • Overseas investor not supervised by financial regulators at places where they are incorporated in shall offer credit rating reports on their performance over the past two years by international rating agencies approved by the CBIRC.

Moreover, during the application process, documents submitted by overseas investors of auto and consumer finance companies are subject to formalities requirements including translation and notarization.

  • Shareholding restriction on foreign financial institutions investing in Chinese-funded financial institutions: Pursuant to the Measures, if a foreign financial institution intends to invest in a domestic-funded financial institution, it shall meet the requirement that the shareholder ratio of a single foreign financial institution shall not exceed 20% after the investment. Pursuant to Artle19 thereof, foreign financial institutions’ investing in domestic-funded auto finance companies shall not subject to the relevant provisions of the Measures for the Administration of Automobile Financial Companies, and the foresaid ratio (i.e. 20%) is not applicable.  Oppositely, the Measures does not rule out the circumstance of investment in a domestic-funded consumer finance company by foreign financial institutions, which we understand is probably because the Measures was came into force in 2003 when early model of consumer finance companies had not yet formed. However, the Measures impose legal restrictions on foreign financial institutions investing in domestic-funded consumer finance companies in practice.  In the process of opening up the PRC financial market, we believe that it is likely to explicitly remove or loosen up the relevant limitations on foreign investment, and create more opportunities for foreign investors to invest in established domestic-funded consumer finance companies.

[1] http://sjr.sh.gov.cn/Category/Detail?informationid=151788&categoryid=76