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Pawnshops make a comeback... in a big way
Over a recent weekend, Zhang Deyi, a businessman in the plastics-processing industry, met a client who was in a puzzle about capital turnover and eager to sell his plastics stockpile at a low price for cash. Zhang decided to seize the opportunity. However, he could not pay the 150,000 yuan (US$18,072) asking price in cash immediately. Zhang was in proverbial hot water.
Official sources disclose that China now boasts more than 1,300 pawnshops with more than 11,000 practitioners and a total registered capital of 9.5 billion yuan (US$1.14 billion). By the end of 2003, there were 42 pawnshops with an annual turnover reaching 3 billion yuan in Shanghai, China's economic centre, alone. Guo Jinshan, deputy president of the National Pawnbroking Special Committee, noted that since 1987 when China's first new-style pawnshop appeared in Chengdu, the capital city of Southwest China's Sichuan Province, services have mushroomed in the country, fast "becoming a new channel for Chinese people to solve their financial problems." A recent survey of four pawnshops in Beijing shows pawned items include such articles as jewelry, antiques, household appliances, over-stocked and off-season products, as well as automobiles and houses. And more than 90 per cent of the pawned items have been redeemed within the pawning periods, which is quite flexible from five days to as long as six months. Statistics show that some 90 per cent of the clients of China's pawnbroking industry are individuals. Among them, more than half are private entrepreneurs. This is attributed to the simplicity of pawnbroking procedures. A client only has to show his or her identity card and related legitimate certificates which can justify his or her ownership of pledge. Then it usually takes 30 minutes for the pledger to get cash in a simple case or several days in a complex case. Wu Qing, an associate professor of the Finance Department of University of International Business and Economics in Beijing, believes the prosperity of the pawnbroking industry is closely linked with China's immature personal credit system. Unlike pawnshops, Chinese banks have been consistently raising the basic requirements for loans to more effectively keep credit risks under control. Since the beginning of this year, China has carried out a macro-control policy and tightened loans to real estate enterprises. As a result, many small and medium-sized real estate companies have actually had no access to bank loans and have begun to seek help from pawnshops. In South China's Shenzhen, real estate companies have already accounted for 20 per cent of the business volume of the pawnshops. Meanwhile, the pawnshops in Hangzhou, the capital city of Zhejiang Province, achieved a total turnover of 2.26 billion yuan (US$272 million) in the first six months of the year, among which 50 per cent are related to real estate companies. Increased risks Industry insiders point out that with the rapid development of real estate, pawnshops are facing increasing risks. Some pawnshops only boast 50 million yuan (US$6 million) of registered capital, but they have provided more than 100 million yuan (US$12 million) of pawned money. Guo Jinshan stressed that "differences exist between the new pawnshops of today, which are characterized by providing convenient short-term financing services, and those before the 1950s, which were exploitation-oriented and conducted in the name of helping the poor." On November 23, 1954, the People's Bank of China, the country's central bank, held a symposium against usury and made the interest rate of credit unions as the sole legitimate standard for loans in China. This in turn restricted the development of traditional-style pawnshops. With the socialist transformation of capitalist enterprises in 1956, many pawnshops were transformed into independent organisations specializing in providing small mortgage loans and became affiliated to the PBC's subsidiaries - a move that marked the end of traditional pawnshops on the Chinese mainland. Guo attributes the successful revival of pawnshops to their convenient services for short-term and contingent funds. "It's a beneficial supplement to China's existing banking system," he said. As the nature of pawnshops is not clear, however, some provinces view them as financial institutes, while others do not. Several years ago, there were a dozen government departments claiming to have rights of administrating and supervising pawnshops. The chaotic situation ended in 2003 when the industry was formally put under the supervision of the Ministry of Commerce. In order to facilitate the healthy development of the industry, the ministry has recently hammered out a draft of regulations on the pawnbroking industry for further public deliberation, which has aroused attention from all walks of life. "One of the controversial clauses of the draft is that the minimum registered capital of new pawnshops should be 5 million yuan (US$602,409)," Gao said. An experienced pawnbroker, surnamed Wang from Northwest China's Ningxia Hui Autonomous Region, argued that "it is inappropriate to prescribe a single solution for diverse problems," although he admitted that raising the minimum level of registered capital could enhance pawnshops' capabilities against risks. Wei Jingtao, Director of the Pawn Research Institute of Economics Academy of Hubei Province, shares similar views. He said that even 5 million yuan of registered capital seems inadequate for the normal operation of a pawnshop in East China's developed regions, but 3 million yuan is enough for most pawnshops in western China. The controversial draft also contains a clause that "prohibits mortgage loans with on-going real estate projects as pledges." Wu Chengxue, president of the Chongqing Pawnbroking Association, doubted the appropriateness of the clause. He said that a large proportion of pawnshops in southwestern China are involved in such kinds of businesses, but the bulk are conducting such businesses when those projects have entered the ending period, and the land agents have received the licences to sell houses. "I think the government should allow the pawnshops to make decisions on their own," he said.
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