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Dealers turn to pawnshops as loans dry up

(Xinhua)
Updated: 2009-02-19 22:50

Sunny Loan Top Co, China's only listed pawn shop, estimates that its 2008 net profit dropped as much as 50 percent on asset write-offs after several major clients, hit by the economic crisis, defaulted on their loans.

"The economic crisis is not a blessing for all pawn shops," said Wei Tao, an analyst at China Securities Co. "Although business has increased, asset quality is deteriorating as companies go bankrupt due to the economic problems."

A customer looks at jewellery and watches at the Oriental Pawn shop in Shanghai in this picture taken February 9, 2009. [Agencies]

Since last year, Shanghai Oriental has taken a series of measures to ward off potential risks.

It stopped taking shares as collateral, tightened scrutiny of applicants and adopted a more conservative approach in evaluating assets used as collateral, such as real estate.

"The crisis is putting us to the test on controlling risk," Wang Fuming, the company's chairman, said in his office in a dingy building behind the pawn shop. Inside the store, counters were laden with jade, gold bullion, necklaces and pricey watches.

"We are luckier than some rivals who have been burnt by the crisis.

Established in 2002, Shanghai Oriental has extended 6.7 billion yuan (almost US$1 billion) in loans, of which about two-thirds are to small and medium-sized enterprises.

"About 90 percent of small businesses in Shanghai fail to get bank loans," Wang said. "The problem is more severe during a weak economy."

Drop In the Bucket

The Chinese government has eased monetary policy and urged banks to lend, with January lending showing a record pace of growth. Yet most new loans are directed at the country's 4 trillion yuan economic stimulus plan and state-owned companies.

Pawn shops charge clients a monthly rate of about 3.2 percent, much higher than about 0.44 percent for bank loans, but cash-strapped borrowers are attracted by their efficiency and convenience for short-term loans.

It takes as little as two hours for a pawn shop to assess the value of a property offered as collateral and about one week to put money in the hands of a qualified client. At a bank, the procedure for a small business loan would take at least a month.

Shanghai Oriental also allows clients to borrow money for periods as short as several days, which is impossible at banks.

Pawn shop owners acknowledge, however, that their lending will remain just a drop in the ocean in China's financial system, even with rapid growth.

"We cannot save China's economy," Wang said. "But the crisis has made us more focused on serving small businesses and I believe the industry has huge room to grow."

Nationwide, the industry as a whole is still tiny with only about 36 billion yuan in net assets spread among some 2,800 players, according to the China Pawn Association.

China's Ministry of Commerce has approved the issuance of 240 new licences for 2009.

"Pawn shops serve a small, niche market, so you couldn't expect it to grow into a big industry," said Sun Jian, an analyst at Shenyin Wanguo Securities Co.

"But in China's coastal provinces such as Jiangsu and Zhejiang, they've become a regular source of funding for small businesses. In the past, you were treated with scorn if you walked into a pawn shop."

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