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Pawn: Fast Cash at a Price

Who do you turn to when you must borrow some cash?

Many might say “banks,” but a bank loan is not easy to come by; it may take days or even months before a bank will willingly lend money. Even then, they may not be very generous. This is when pawn shops come to mind.

Despite a long history, today’s pawn shops in China are hardly laozihao (time-honoured brands) that have weathered hundreds of years of ups and downs. They are freshly emerging institutions, products of China’s reform and opening, with a life of only about 20 years.

Re-emerging in 1987, China’s pawn industry has grown to more than 2,000 outlets reporting registered capital holdings of 18.6 billion yuan (US$2.4 billion) and loan issuances valued at 98 billion yuan (US$12.7 billion) in 2006. Beijing has 87 pawn shops, including 12 branches that issued 2.44 billion yuan (US$317 million) in loans, also in 2006. 

The re-emergence and quick development of the pawn industry is happening alongside the rapid development of the Chinese economy, according to Li Sha, director of the Hope Pawn Research Centre, a professional consultancy and research institute. “The development of any economy requires corresponding financial services and the re-emergence of the pawn industry is a result of the adjustment of a financial system that needs to provide the diversified financial services needed by various kinds of people.”

Aside from the needs of a fast-growing economy, the pawn industry has its own unique advantages. At the top of the list is its convenience. People can usually get cash immediately after they bring goods to a pawn shop. Even in the most complicated transactions, such as a pawn of real estate, one or two days are normally all that’s required for customers to get fast cash if legitimate documents are provided.

But the industry is also changing with the times, perhaps in surprising ways. Contrary to historical images of poor people pawning their clothes for food, as in old times, few people are turning to pawn shops for their basic livelihood today, said Yang Yong, general manager of the Beijing Huaxia Pawnshop Company, Limited. “Most of our customers are pawning houses or stocks so they can make short-term investments or to start their own businesses. Sometimes, small and medium-sized enterprises have short-term cash-flow problems, and borrowing money from banks is time-consuming and complicated. People also tend to choose pawning as a way to avoid the awkwardness of borrowing from relatives or friends.”

One unique characteristic of China’s pawn industry, and one that seems to depart from the basic rules of pawning, is real estate, which has been pawned in China since 2002. People can still live in their houses if they pawn them for money, which seems an ideal way of financing for some borrowers, while it increases risks for pawn shops, because it is much more complicated and time-consuming for pawnshops to get their money if the owner of a pawned house dies. However, the real estate pawning business is a high revenue activity, accounting for about 60 percent to 70 percent of some pawn shops’ lending business.

Another quirk in Chinese practice is that stocks may also be pawned. To effectively control risks, the pawn shop, customer and a securities company must sign an agreement beforehand to identify a level of compulsory selling,，which means pawn shops have rights to force a customer to sell their stocks to redeem their pawn ticket if they fall in value below a predetermined level. 

Material objects that are pawned, then, contain inherently fewer risks; they are more secure than some bank loan collateral, if the object is properly valued, according to Yang Yong. “We have to first distinguish real and fake stuff and make sure it’s not stolen, and then appraise it according to its original value, abrasion level, market price and many other factors. We have to maximize interest if they refund it and minimize the risk if a borrower dies. And if the pawned object is proved to be stolen, we face the risk of having it confiscated by the police.”

Its convenience, simplicity and risks decide the high interest rates of the pawn industry. According to the Pawn Industry Administrative Measures issued by the Ministry of Commerce in 2005, monthly comprehensive fee may not surpass 4.2 percent for mobile properties, 2.7 percent for real estate and 2.4 percent for property rights (stocks, bonds and others). The comparatively high cost of pawn loans contributes to a high return-to-investment of 30 percent in the industry.

However, no matter how convenient it is, in Professor Li Sha’s opinion, the pawn industry will never replace banks as the main channels of financing. “The pawn industry usually accounts for 1 percent to 2 percent of a country’s total loan debt,” Li said. “It is useful and a complement to banking, but the characteristics of the industry decide it is just a 'little brother' in the financial system.

“It has no right to accept deposits, and it must depend on private capital, and, although the government has allowed pawn shops to set up branches, it still strictly restricts the businesses to pawning, not allowing for retail or consignment selling businesses that contribute to 50 percent of pawn shops’ profits in America and in many other countries.”

As with many other industries in their initial stage of development in China, laws and regulations concerning the pawn industry are incomplete. Foreign capital is still restricted from the industry. However, most industry insiders believe it’s just a matter of time before foreign investment can get access to the industry.

“The banking sector, as the main part of the financial system, has been opened to foreign capital, and the pawn industry, as a sideline financial institution, has no reason to be shielded from foreign money,” said Li.

The pawn business, whether in China or elsewhere, has its origins in antiquity with a history of nearly 2,000 years. Records indicate China’s pawn industry came into being about 1,500 years ago during the Southern and Northern Dynasties (AD 429–581), when temples that were accumulating money because of flourishing religions, began using some of their donations to give loans to poor people as an act of charity.

With the passage of time, the pawn business gradually became a significant industry fed by private and government capital: even imperial investors got involved. During the Jiaqing emperor’s reign (1796–1820) during the Qing Dynasty (1644–1911), there were reportedly 23,139 pawn shops in China.

It seems the industry, too, has always had a problem with its image. Thinking of an ancient pawn shop or even one from the early 20th century, one might conjure a scene of a high, wooden counter with a poker-faced clerk sitting behind protective bars, while a man in rags pleads for a better price for some off-season clothes or a family heirloom.

Outdated though this image may be today, this is not an unfair description of a pawn shop encounter in olden times. Pawn shops do usually have a high counter—normally higher than four chi (1.33 metres)—so customers have to try hard to reach and talk to a clerk. This simple design actually has strong psychological meaning: it results in customers feeling dwarfed and lulls them into a disadvantaged position in the bargaining process. Clerks sometimes sit on high stools, which allows them to talk over the heads or to talk down to customers in an arrogant and despising manner designed to undervalue the sellers and their goods as much as possible.

In addition to these tricks, another practice is to devalue goods being pawned. Gold and silver stuff are described as brown instead of yellow or as “lead,” so the pawn broker can beat a sales price down by 30 percent to 50 percent of the gold’s real value; fur coats might be described as “moth-eaten.” In addition to devaluing the goods and lowering pawn payments, it puts the customers in a difficult position when their goods are redeemed but have not been well cared for while in hock.

But, despite a bad reputation, the pawn industry continued to develop in the feudal society because of China's undeveloped financial system. Some large and well-established pawn shops were even allowed to issue credit notes. During the Republic of China period (1911–1949), some pawn shops in Shanxi Province were allowed to issue credit bills of up to three times their capital. One pawn shop in Shanxi Province had a capital of 15,000 silver dollars. It was able, however, to issue credit bills worth 270,000 silver dollars because of its connections with Yan Xishan, he warlord who ruled the province from the 1920's through to the late 1940's. But with the emergence of initial forms of banks and other kinds of financial institutions, the pawn industry began a gradual decline near the end of the Qing Dynasty. By the 14th year of the Guangxu emperor (1888), the number of pawn shops had decreased to about 7,000; there were only 4,000 in the country when the Republic of China period began.

With the massive socialist reforms entrained with the founding of the People’s

Republic of China in 1949, the pawn industry was eliminated. But, after 31 years, it re-emerged on the Chinese mainland in 1987 as part of China’s market-oriented economic reforms.