China has announced the final version of its auto finance regulations, fulfilling a key commitment made upon its World Trade Organization (WTO) entry at the end of 2001.

The Administrative Rules Governing Auto Financing Companies, released by the China Banking Regulatory Commission (CBRC) on Saturday, set forth auto financing companies' (AFCs) functions, their incorporation requirements, the steps for change or termination, their business scope and penalties for non-compliance.

The rules stipulate that foreign and domestic non-financial institutions wanting to set up car financing businesses in China must have minimum assets of 4 billion yuan (US$480 million).

Non-banking financial applicants must have a minimum of 300 million yuan (US$36 million) in registered capital. Such auto financing businesses must have at least 500 million yuan (US$60 million) in registered capital.

Under the rules, the AFCs are allowed to extend car purchase loans or provide guarantees for such loans, offer car procurement or equipment loans to auto dealers, accept three-month deposits or longer from shareholders and borrow from other financial institutions.

"The formulation and implementation of the rules signify China's commitment to fulfilling its WTO entry obligations, and will contribute to the opening-up and sound development of China's auto financing market,'' a CBRC spokesman said.

The market is lagging far behind many other countries. For the time being, the major credit providers in the Chinese market are commercial banks and finance companies affiliated to automobile groups, while non-bank financial institutions including trust companies, financial leasing companies and other kinds of finance companies are not able to take part.

Although loans to individual auto buyers have grown dramatically over recent years with the volume in 2002 being 286 times that of 1998, they are still "far from sufficient to meet the needs of auto buyers, which is illustrated in the fact that less than 20 per cent of auto sales are financed with loans, far less than the average 70 per cent in the more developed foreign markets,'' the spokesman said.

The central People's Bank of China, which supervised financial institutions prior to the establishment of the CBRC in April, published a draft of the rules at the end of last year for public comment. They required investors to have at least 8 billion yuan (US$960 million) in total assets, which many analysts as well as automakers complained was too high.

The growing number of car loan defaults in recent years has prompted nearly all major domestic insurance firms to announce over the past few months suspensions in the sales of car loan insurance policies.

But that has not offset the attractiveness of China's auto market. The financing arms of global automakers including Ford and General Motors were among the earliest to apply to the central bank to set up car financing branches in China, hoping the vast new market would boost their international sales.

In order to minimize risks, the rules require that AFCs have capital adequacy ratios of no less than 10 per cent.

Consistent with the circulation of the new regulations, a set of corresponding implementation rules formulated by the CBRC will be released soon, its spokesman said.

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