A middle-aged man in shabby dress scoots through the entrance and tiptoes towards the seven-foot-high counter to pawn his watch for a few dollars to buy food for his family - a typical scene in Chinese movies in the 1950s and 1960s.

Now, pawnshops are a dying breed in Hong Kong, their role taken over by banks and finance companies that have been aggressive in luring borrowers with easy cash.

Pawnshops are gradually vanishing as borrowers have multiple and easy lending sources such as cash overdraft through credit cards, personal loans offered by banks, and even several-minute on-line lending created by some finance companies.

But on the mainland, pawnshops have taken on an entirely new lease of life by encroaching on businesses that are traditionally done by banks in most other countries. In many major mainland cities, particularly Shanghai and Guangzhou, pawnshops are located in fancy office buildings and offer car loans and multi-million dollar mortgage financing.

To be sure, there are still neighborhood pawnshops where less-well-to-do folks take their measly personal belongings in exchange for a few yuan for the next meal.

But, by and large, pawnshops on the mainland are finance companies catering to the fast-rising middle-classes in large cities.

Mortgage Items

"The new mortgage business, such as stocks and properties, greatly expanded the industry's market," said Li Jie, general manager of Zhong'an Pawnshop, the first one founded in Shenzhen in 1993.

The stock mortgage accounts for at least half of Zhong'an's turnover, although its yearly interest rate is only 10 percent, compared to the monthly rate of 3.7 percent for properties and that of 5 percent for cars, which indicated the extremely large transaction volume of stocks and also the high rate of return.

High-value items such as stocks, properties and cars take up roughly 85 percent of the firm's revenue, Li said. Her pawnshop, a 40-metre-square room with around a dozen well-dressed employees in suits and ties, looks more like a bank office than, well, a pawnshop.

"Most newcomers to the industry are using their properties and stocks as collateral for loans," said Wu Xianda, manager of Shanghai Hualian Pawn Co, one of the three sister pawnshops under Hualian Group.

"But without professional expertise in evaluation and sufficient capital, property mortgage business and stock financing can be extremely risky," he added.

Some new market players are well prepared as they are certainly aware of the old adage: the higher the gain the bigger the risks. For example, Dongfang Pawn opened in May with the largest registered capital of 50 million yuan (US$6 million) for pawnshops in Shanghai. Its shareholders include a securities company and a property trading company.

In addition to new mortgages, pawnshops also create new personal loan products to satisfy people's thirst for capital.

Before the seven-day National Day holiday, Shanghai's Oriental Pawn launched "tourism loans", which are specially designed to meet fund demand for holiday travels with short redeeming periods and low fees.

Quick Money

The so-called "modern" pawnshops thrive mainly on the inadequacies of the banking sector on the mainland. Cash-strapped enterprises and individuals have to spend months and submit many credit documents before they can obtain a loan from banks. They are the lucky ones. Many loan applications from privately owned small- to medium-sized companies and individuals have never even gone beyond the preliminary stage.

But pawn your car and you can get the money within a week with no credit background check.

Shanghai General Motors' Sail for instance, a popular compact model that cost 120,000 yuan (US$14,457), can be pawned for a loan equivalent to 80 percent of its market value at a typical pawnshop.

Unsurprisingly, the majority of pawnshop customers are no longer low-income people but affluent people who have valuable items to pawn and owners of small-and-medium enterprises (SMEs) who are in dire need of cash.

"Our customers are usually rich or business people who are having some cash problems... poor people have few valuable things to pawn," said Wu of Shanghai's Hualian Pawn Co.

The Chinese mainland has 1,000-odd pawnshops with a combined registered capital of 6.3 billion yuan (US$763 million), according to National Pawn Broking Committee.

The average net profit margin in the industry is about 25 percent, much higher than the average level in companies, experts believed.

In Shanghai, the total of 12 pawnshops, with a registered capital of 80 million yuan (US$9.64 million) together, recorded operating revenue of 40 million yuan (US$4.82 million).

An industry like this with high profitability and large market potential is definitely attractive for investors.

"There will be 23 pawnshops in Shanghai soon, and we have received plenty of applications for new shops," said Liu Weidong, deputy-director of the administration of service industry under the Shanghai Commerce Committee. Liu is responsible for overseeing the city's pawnshop sector.

"In a market economy, capital naturally flows to the places with high returns," he added.

One reason for the solid profits: a limited number of market players in a period of strict government control, Liu noted.

Rapid Expansion

Pawnshops, once regarded as "bloodsuckers", were banned in the 1950s but came back in 1987 with the opening of Huamao in Chengdu, capital of Southwest China's Sichuan Province.

Since then, they have developed rapidly in every corner across the country.

The total number of pawnshops rose to more than 3,000 in 1996, although shrank more than half to 1,350 later that year after the People's Bank of China, the country's central bank, issued a strict regulation.

The National Commerce and Trade Commission, which later took over the industry, issued another guideline in 2001 to expand the business scope of pawnshops. It also lowered the required registered capital for a pawnshop from 5 million yuan (US$641,000) to 3 million yuan (US$384,000).

The new guideline reflects the government's support for the industry.

As China's financial system is far from advanced, the pawnshop industry can be an effective complement and enjoy considerable room for development, said Zhuo Ou, professor of Guang-zhou's Zhongshan University.

"Pawnshops are complementary to banks. The fast and convenient business does solve a short-term cash shortage," he said. "The development of the pawn industry can promote credit consumption in China."

To strengthen the pawnshop sector's competitiveness, the State Economic and Trade Commission is to draft a new regulation to allow foreign investors to enter. This was revealed by Zhang Wubo, senior official of Shenzhen's Economic and Trade Bureau.

The new regulation is set to be introduced by the end of this year, he said.

Zhang revealed that Shenzhen is striving to take an early step to attract overseas investors to give a further boost to pawnshop businesses.

"The new regulations will pave the way for stores to grow bigger with sufficient capital and advanced foreign management," he said, adding that a couple of investors from Taiwan, Hong Kong and the United States have shown interest in the market.

China Daily has also learned that Shenzhen's largest pawnshop, Zhong'an Pawnshop Co, is negotiating with a United States-based financial company to set up a joint venture.

Sources close to the negotiations said that the two were considering developing the joint venture to chain stores whose positioning was high-value mortgages such as stocks and houses.

The industry is going to be more capital and expertise-intensive.

Some of the pawnshops have to develop into giants to reduce risks and improve competitiveness, said Li Sha, professor in the research centre of Beijing Huarong-Tiancheng Pawn.

With governmental support and the coming of strong-backed companies, the industry would experience a period of explosive growth in the next two or three years, he said.

Limited Role

However, no matter how developed the pawnshop sector is, it will still be just a very small industry, a supplement and not part of the mainstream in the financial system.

"The pawn industry will never become a competitor to the banks. Even in the US, the US$9 billion loans in the industry can be safely ignored in the country's financial system," said Wu of Shanghai's Hualian pawnshop.

In the United States,150,000 pawnshops had total loans outstanding of US$9 billion in 1998.

The high cost of pawn mortgages could prevent pawnshops from becoming a crucial fund-raising channel for SMEs.

The monthly charges of pawnshops range from 3.5 percent to 5 percent, which are on average 10 times higher than bank interest rates. Even at a rate of 2 percent, an enterprise would have to pay 124,000 yuan (US$15,000) after a year if it borrowed 10,000 yuan (US$12,000) from a pawnshop.

"Pawnshops can only help SMEs go through a short cash-tight period but not finance their operations," Liu of Shanghai Commerce Committee said.

With the development of Chinese banks and other financial institutions, the room for pawnshops will be squeezed because banks would charge less, experts said.

Some of the shops' businesses have already flown to banks. For example, the Construction Bank of China has launched a future mortgage service that was run formerly only by pawnshops, said Liu.

But the industry will never go extinct because demand will always exist, he concluded.

(China Daily HK Edition October 11, 2002)