Talk is cheap, say foreign carmakers

The auto industry has been China's hottest sector since the country joined the WTO with foreign producers piling in to capture a slice of the action, but companies are still awaiting full compliance with promises made.

Analysts predict China will become the world's largest car market by 2020, and foreign carmakers have eagerly, if not over zealously, jumped into the once rigidly controlled sector to set up shop.

By most accounts China's entry into the WTO in December 2001 was a boon to foreign and domestic auto makers, as an increasingly wealthy country has helped spark an explosion in auto demand.

"In the past two years, China's sedan demand jumped really quickly in the wake of increased monetary conditions for many Chinese people," said Gu Shaohua, an analyst from Beijing Tianxiang Investment Consulting.

"As a result international auto makers were not willing to stay put, waiting for the market to fully open."

With few exceptions, the world's top auto manufacturers have all set up joint ventures to produce vehicles amid booming domestic sales and slumps in more mature markets.

Yet nearly two years after China joined the global trade body, the promises it made remain incomplete.

Foreign car makers have not been allowed to offer car financing to customers in China even though Beijing vowed to open up that market as part of the country's commitments.

Although it guaranteed access to foreign multinationals immediately upon WTO entry, Volkswagen, General Motors and Ford are still waiting for China's central bank to issue regulatory details.

"For foreign car markers who are awaiting the full opening of China's auto financing market, entering into auto financing will be an obvious strategic breakthrough into China's whole financial market," said Zhang Jikang, professor from Fudan University.

An initial set of draft rules on auto financing, including an unusually high capital requirement of 500 million yuan (US$60 million), surprised industry insiders when they started circulating last year.

Currently, commercial banks are the only financial institutions allowed to offer auto financing, forcing Ford and others to sign interim agreements with them to provide the service to customers.

Analysts said that Beijing's foot dragging is in part due to concerns about the fragility of China's financial system.

"There exists worries that a full liberalization of the market might bring big impacts both to domestic banks and auto makers," Gu said.

"If foreign auto makers emphasise the promotion of their cars produced in overseas plants, then China's domestic auto makers, which have joint ventures with foreign counterparts could suffer a lot from that," he said.

Daniel Zhang, analyst from Shanghai Securities, said: "The opening of China's auto financing is not only an issue in the auto industry, but in fact it belongs to the whole financial system.

"Given the weak situation of China's financial system and the bad debts in domestic banks, the government feels it's not a good time," Zhang said.

But while China has moved to open its car market under its WTO obligations, it is simultaneously striving to protect and nurture its more than 100 small car manufacturers.

Most recently, planned tax policies will penalise domestic or joint venture auto makers that use imported car parts.

A 38 percent tax increase, the same rate as the current import car tariff, will be levied on auto makers that use foreign components.

Foreign auto makers contend the policy as shortsighted, putting at a disadvantage joint-venture partners, as well as requiring technology transfers and limiting sales distribution rights for foreign producers.