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PAWNSHOPS, the oldest financial institutions in China, have been undergoing a dramatic revival since the lifting of a 30-year ban in 1987. Over the 2007/08 new year period, Beijing pawnbrokers reported a 30 percent rise in transactions, with an increasing share involving medium-sized and small businesses needing fast loans. “Twenty years after its comeback in China, pawnbroking is regaining some of the buzz it had in the old days,” declares Hao Fengqin, secretary general of the Beijing Pawn Trade Association.

Substantial Market

Demand

The increase in businesses utilizing pawnbroking services can partly be attributed to prevailing domestic economic conditions. The Chinese economy began to face the risk of overheating and suffering serious inflation after persistent 11 percent growth throughout the first three quarters of 2007. The risks prompted the government to take precautions, and on December 5 a shift in monetary policy from “prudent to tight” was announced for 2008. Three days later the Peoples Bank of China announced a one-percent increase in the Renminbi deposit reserve ratio, cutting into the money supply for loans.

The effects were immediately felt by Chinas smaller companies, who are inevitably always at the bottom of banks corporate borrowers lists. This has provided a perfect opportunity for pawnshops to expand their turf. A 2007 study on local pawnshops by the Beijing Pawn Trade Association revealed that 90 percent of customers are individuals and 10 percent are medium-sized and small businesses. However, these days 75 percent of pawn loans are used for productive purposes. In other words, pawnshops are no longer simply places for the broke. Most patrons are well off, and come seeking cash for a variety of reasons.

Project manager Li Zengxian, for example, was stumped by a hitch in capital turnover. He took the buying contract and ownership certificate of his villa to the Bao Rui Tong Pawnshop, and had the property appraised at RMB 3.55 million. On paying a fee of RMB 64,000 at the rate of 3.2 percent of the propertys value, Li received a loan of RMB 2 million. “The money saved me,” he claims. “Compared with banks, pawnshop loans come at a higher cost, but can be obtained much faster.” At the end of every year many companies are in urgent need of money to refund bank loans or stock goods. Pawnshops appeal as a channel of expeditious financing.

Origins of the Trade

Pawnshops first appeared in China in the fourth century, and were widespread by the Song Dynasty (960-1279). During the Qing Dynasty (1644-1911) there were 23,000 pawnshops across the nation, 300 of them in Beijing alone. “There was a saying amongst Chinese at the time: to make quick, big money, open a pawnshop,” said Hao Fengqin. Pawnshops played a significant role in a society based on an autarkic agricultural economy with scant financial institutions. For many people they were the only means of obtaining cash for urgent needs.

The trade was loathed by the general public however. Pawnshops in ancient China charged extortionate interest rates on collateral redemption, and some physically bullied customers in collusion with corrupt officials. The Peoples Republic banned pawn businesses in 1956, denouncing them as “a symbol of an exploitative economy.”

The need for pawnshops re-emerged after China entered the opening-up and reform period in the late 1970s. After decades of prohibition, a private economy was permitted on the mainland, igniting a boom in private enterprises. By 1990, companies were being formed in Beijing at the rate of 2,000 a month. Meanwhile state-owned commercial banks were still hamstrung by old regulations capping loans for private businesses at RMB 50,000. Chinas swelling legion of private enterprises hungered for capital, stimulating the resurgence of pawnbroker services. In 1987 the Huamao Pawnshop in Sichuan Province opened for business – the first pawnshop on Chinas mainland since 1956.

In the decades since, pawnshops have changed and progressed with the times. In the 1990s the majority of pledged items were gold, silver and electrical home appliances. Today they are more often automobiles, houses, bonds and securities. According to a report by the Ministry of Commerce, in the first half of 2007 China had 2,342 pawnshops whose gross assets amounted to RMB 86.2 billion. Their total business value reached RMB 44.1 billion in the first six months of 2007, a 31 percent increase from the same period in 2006.

Discounted Luxury Goods

The shift in the demographic of those seeking loans at pawnshops has also led to a change in the shopping clientele. With China getting richer, the lust for luxury items is growing stronger. Savvy buyers have discovered pawnshops offer access to expensive brands at a lower cost. Cao Xin is one of the increasing number of Chinese ferreting out luxury goods in these establishments. He bought a brand-new Rolex for RMB 4,600 at Huaxia Pawnshop. “The shop has professionals to verify the quality of commodities before taking them in, so I dont have to worry about encountering phony pieces,” he says confidently. As Yang Jingkun, assistant general manager of Huaxia, explains, “Many collateral items arrive in stores completely unused. And frequently their owners express no intention of retrieving them.”

During Spring Festival (the most significant holiday in China, often known as Chinese New Year in the West), most family members and business partners follow the social norm and exchange sumptuous gifts. Many of these quickly end up on pawnshop shelves. Around festival time, unwanted presents comprise as much as 30 percent of items being pawned.

While the need for quick cash is the most common reason people offer up their goods to pawnbrokers, others use pawnshops as a safekeeping service. Chen Cheng, for example, handed his car to Bao Rui Tong pawnshop before a family vacation. “A parking lot in any residential area of the city charges RMB 300 or so a month, but cannot assure me 100 percent safety of my vehicle.” In a pawnshop Chen paid a fee of RMB 470 at the rate of 4.7 percent for a minimum one-month loan of RMB 10,000. He regards the extra sum as money well spent; the shop will keep the car secure and absolutely free of damage. Whats more, they give the vehicle basic maintenance.

Wang Ying is another example of those using pawnshops as a safe deposit. Like many fresh graduates, she shares an apartment with others in Beijing. When she planned a vacation out of the city, she could find no better place than the pawnshop to store her diamond necklace. “Its not wise to wear it while traveling, or leave it at home. So the pawnshop came to mind.” Wang pawned it for just RMB 500, and paid a 4.7 percent fee. “The smaller the loan, the smaller the service fee.” She simply handed back the cash and reclaimed the necklace when she returned to Beijing.

Old Prejudices Die Hard

Hao Fengqin is a loud advocate for the pawn trade, arguing it is a necessary complement to mainstream financial channels. But ingrained prejudices against the trade die hard. It is still widely believed that only the poor pawn, a maxim passed down by older generations and reinforced by films and TV dramas set in Chinas feudal past.

Lis Pawnshop in Beijing is one of the few that has been preserved in its original state. The fortress-like solid brick structure gives an indication of how pawnbrokers were regarded in ancient times. The windows are narrow and above the gate stands a watchtower, where guards once vigilantly watched for attackers. A huge screen behind the door blocks the shops counter from passers-by, saving customers the embarrassment of being spotted by acquaintances.

The attitudes reflected in the construction of Lis Pawnshop persevere today. Most people dont let others know of their visit to such an establishment, and refuse paper bags bearing shop names or logos. Some park their cars far away, and reiterate that transactions must be “kept secret.” Liu Meifang, general manager of Bao Rui Tong, can understand this behavior. “Many of our clients are businesspeople. If word reaches their clients they raise funds through pawning, suspicions will arise they have financial problems, which could ruin their business.” Liu doesnt expect such attitudes to change soon. Even in the 1979 edition of Cihai (Sea of Words), the most authoritative and popular Chinese-language dictionary, a pawnshop is defined as “an establishment that issues usurious loans on the security of goods.”

Another issue that stymies the pawn trades growth is a shortage of professionals. “During the 2007 Beijing International Finance Expo, pawnshops put up hiring advertisements to woo talent. But many young people shied away,” recalls Hao Fengqin. “Even those who filed applications did so stealthily. If a bank hires, a big jostling crowd will form in a minute.” Yet in reality there is little difference in the services offered by the two. Whatever peoples view of the trade, it seems pawnshops are here to stay, an inevitable part of modern Chinas explosive economic growth.