As it turns out, there is such a thing as being too successful in selling one’s wares, a reality that China’s pawn shops are about to become acquainted with, it seems.
Unlike in the U.S. – where pawn shops represent a small slice of a niche segment of financial services – in China they have quietly become a major, if often invisible, force in citizens’ economic lives. In 2017, Chinese pawn shops lent out around $43 billion, primarily to small business borrowers, and often at exorbitant interest rates.
And the industry has grown quickly in the last decade. The number of pawn shops in China has doubled to 8,500 since 2010, and the average loan amount has climbed to around $26,000. By way of comparison, there are 11,000 pawn shops in the United States, but the average loan size is only around $100.
And where there is growth in China, government interest is sure to follow. As of now, the country’s insurance and banking regulator is beginning to draft new rules aiming to toughen up oversight in the pawn shop lending industry, according to sources cited by Bloomberg.
The new regulations will reportedly move regulatory control of pawn shops from the Ministry of Commerce to the jurisdiction of the China Banking and Insurance Regulatory Commission (CBIRC). There is also speculation that the new rules will increase capital requirements for pawn shops. The CBIRC will broadly oversee the industry, but local governments will handle day-to-day supervision, an approach currently used for peer-to-peer lenders in China.
Small business borrowers are pawn shops’ most frequent customers, agreeing to high-cost loans in exchange for working capital. More than half of all pawn shop loans in 2017 were underwritten to SMBs and backed by real estate.
Regulatory action aside, however, the market may have been headed for contraction no matter what, as competition has made it harder to operate profitably. More than a third of China’s pawn shops were reportedly losing money as of early 2018 – and the overdue loan ratio was at 13 percent and climbing. Shares in 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.
Those defaults, reportedly, are brought on by high costs. A typical loan in Shanghai comes with an interest rate of about 2 percent a month, or an APR of 24 percent. A similar loan from a bank, on the other hand, would fetch about a 4.35 percent interest rate. Pawn shops will typically lend up to 40 percent of the value of an apartment pledged as collateral, renewing the loan every six months.
Pawn shop lending remains one of the few arenas within China’s $9 billion so-called shadow banking industry that has yet to draw government oversight. The new push to clean up and control the segment comes as Chinese officials are looking to stabilize the nation’s financial footing after years of rapid but often unsupervised growth.