Give Them Credit

Before GE could reach out to Chinese consumers, it had to learn to work with Chinese banks.

Early on, GE took a cautious approach to investing in China. GE Capital (GE Money’s predecessor) began offering consumer financing for electronic appliances in southern China with a Chinese partner in 1998 only to shut it down two years later, citing tepid interest from Chinese consumers.

Conditions have certainly improved since then. The consumer-finance market has liberalized — this year, foreign-owned banks can begin lending directly to Chinese customers. According to analysts, consumer finance in China is finally ready to take off. The Chinese consumer-credit market (cards, mortgages, and personal loans) will account for 14 percent of banking-sector profits by 2013, up from around 4 percent now. Credit-card revenues will rise by more than 50 percent a year, reaching $5 billion by 2013. The country’s growing car market is creating demand for auto loans, while mortgage volume grew an estimated 18 percent in 2006, according to May Yan, a vice president with Moody’s who expects much higher growth in the coming years.

Barrett is optimistic. “This country is in its infancy in terms of consumer financing,” he says. “It’s a tremendous opportunity for us.”

A Stairway to Profitability?

Shenzhen Development Bank is based in the heart of its hometown, a city of 10 million that has sprung up from virtually nothing in the past 25 years. Like Shenzhen itself, the bank is young — it was one of several privately owned banks established in the late 1980s. As if to make the point that it is a part of a newer breed of Chinese financial institutions, the bank has built for itself one of the city’s most unusual office buildings: a postmodern structure that resembles a giant set of stairs.

Despite appearances, the bank suffers from some old-fashioned woes. For many years, it operated in a decentralized manner, with branch managers making ill-considered loans with little, if any, oversight from headquarters. As a result, 7.9 percent of its loans are probably uncollectible. (Overall, 9.2 percent of loans held by commercial banks in China are considered “nonperforming.”) Furthermore, it has little cash. Chinese banking law requires banks to maintain at least an 8 percent capital adequacy ratio, but SDB has only 3.7 percent, meaning that it is not permitted to expand into new cities. Moody’s gives it a financial-strength rating of just E+. “That’s one of the lowest ratings for a Chinese bank,” comments Yan.

But the bank is a suitable partner for GE Money in one important way: it has $32 billion in assets and 242 branches across China.

Furthermore, the bank’s health is improving. In 2002, private-equity firm Newbridge Capital bought a controlling 18 percent of the bank. Newbridge installed a new management team and moved aggressively to clean up the bank’s balance sheet. The investment firm shares GE’s interest in growing the consumer side of the business and was willing to grant GE a remarkably free hand in fixing up bank operations. GE Money has 30 employees working in SDB and is now involved in areas such as strategic planning, new-product introduction, customer service, and risk management.

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