New guidelines on auto financing are what car dealers and automobile makers need to end the current sluggish demand. But any new rules to liberalize auto loans are not a cure-call for another problem threatening the sector.

China released long-expected revised rules governing auto loans on August 19.

They will come into effect on October 1, allowing more financial institutions to engage in the auto financing business.

Although two thirds of car sales in developed countries involve financing, Chinese banks have so far shied away from such loan practices because of inadequate risk control over borrowers.

It has been previously estimated that about 100 billion yuan (US$12 billion) loans granted to domestic individual car purchasers were non-performing.

Though car purchases through financing accounted for less than 20 per cent of the country's total car sales, it is natural that domestic dealers and manufacturers have blamed the slowdown on the domestic banks' abrupt cancellation of financing services - a result of the country's on-going macroeconomic control strategy.

However, given the vital importance of boosting consumption to sustain economic growth, China cannot afford to give a cold shoulder to the promising auto financing business - a key propeller behind a booming car market - for long.

The new rules, in a sense, serve as a timely booster to the purchasing power of potential Chinese car owners whom domestic dealers are fiercely undercutting each other to woo.

However, better financing rules are not the answer to some critical problems to which manufacturers have failed to address while aggressively expanding production capacity.

The latest decision by the Shanghai municipal government to suspend all its car purchases for a year is a telling story.

Such an act, says the mayor of Shanghai, is meant to ease traffic congestion downtown.

What does this mean?

It indicates that aside from purchasing power, traffic problems have become a real hurdle for the growth of car consumption to overcome.

If this is the case in Shanghai today, one should not expect smoother traffic flow in China's other large cities where growing car purchasing also takes place.

So, while new financing rules can help revive demand for a while, there is little reason for optimism.

The looming impact of worsening city traffic and measures to counter this, hang low and heavy over domestic carmakers vying with each other to multiply capacity.

Source: China Daily