China toughens rules for pawn shop lending

Pawners in the mainland oft-use real estate as collateral

Neon pawn shop and restaurant signs in Mongkok, Hong Kong. shawn michael/Shutterstock

The central Chinese government is tightening regulations over pawn shops in a bid to gain more oversight of the shadow banking industry and the rise of property-backed loans used for undisclosed purposes, Bloomberg reported.

Having taken over jurisdiction of pawn shops from the Ministry of Commerce last year, the China Banking and Insurance Regulatory Commission (CBIRC) is drafting new rules that will, among others, raise the minimum capital requirement for pawn shops from its current level of CNY3 million (USD447,000).

The plans are the latest in Beijing’s more than two-year campaign to place the country on solid financial footing and crack down on the USD9-trillion shadow banking industry.

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Chinese pawn shops extended the equivalent of USD43 billion in loans in 2017, often to small businesses. While they come at higher interest rates than those from banks — Shanghai lending rates typically go for a staggering 24 percent annually — pawn shop loans do not require small business owners to disclose the purpose of the funds.

More than half of loans extended by pawn shops in 2017 were property-backed. Shops typically compel pawners to pledge 40 percent of the value of their apartments as collateral.

Pawn outlets in recent years have come to accept other collateral such as stocks, luxury watches, jewelry, and automobiles.

Chinese pawn shops now number more than 8,500, double the figure in 2010, Bloomberg noted.