China's charge into credit cards

Insight Making purchases on credit is catching on in an economy long used to cash transactions.

While cards have gained in popularity among Chinese consumers, increasing debt is putting extra strain on some families and the government is tightening issuance rules.

Making purchases on credit is catching on in an economy long used to cash transactions. While plastic card default rates are relatively low, some financial experts are warning that Chinese card issuers need to be more cautious in their business practices. Clifford Coonan reports In China, where once cash reigned supreme, credit cards are now carving a niche, and consumers are increasingly reaching for the plastic at the nation's shops, restaurants and hotels.

As the middle class expands, and as the government encourages Chinese people to spend more to keep the economy vibrant, 163 million credit cards were issued in the first half of this year, up 33 per cent from a year earlier, according to the central bank. Last year, the number of credit cards issued in China nearly tripled to 142 million, with total transaction volumes hitting 3.5 trillion yuan (Dh1.88tn). The central bank reckons that about 1.9 billion credit cards have been issued in China since 1985.

Nie Junfeng, an expert on personal debt at CITIC Bank, the country's seventh-largest lender, said the main driver of the number of people carrying credit cards was expanding domestic demand. "But it's also directly from the popularity of credit card usage; according to the data by Central Bank of China, bank card consumption accounted for more than 30 per cent of consumption for the first time," Mr Nie said.

China has focused on the domestic economy to help prop up growth during the financial crisis as the export market has collapsed. This policy has included subsidies to encourage the purchase of cars, refrigerators, flat-screen TVs and other major consumer items. As Mr Nie points out, roughly one-third of credit card payments, or 1.1 trillion yuan, were generated from consumer spending last year, and about 15 per cent of retail sales of consumer goods last year were put on plastic.

Credit cards are increasingly accepted in restaurants, hotels and shops, although foreign credit cards can still be problematic. As a foreigner, getting a credit card from a Chinese bank is not easy, and the foreign applicant for a credit card is asked questions such as: "do you work for a Fortune 500 company?" Domestic consumers may soon get a taste of this kind of rigour. There are growing calls for the government and the banks to more closely monitor the issuance of credit cards, with analysts saying the amount of plastic issued has expanded too quickly, particularly in the face of relative ignorance about personal debt.

Mr Nie said his bank saw applications for credit cards grow by 100 per cent every year between 2003 and last year, although the rate had slowed slightly in 2009. Banks should be vigilant in dealing with all types of risk and should clean up card-issuing sources, he said. The card-issuing banks generally fall into two categories - radical and conservative. State-owned banks were showing signs of being radical in issuing cards, while joint-stock banks such as China Merchants Bank have become more careful and strategic.

Along with the rise in the use of credit cards has come an increase in the amount of credit card crimes. China's central bank, the People's Bank of China, and the ministry of public security are preparing for a nationwide clampdown on crimes related to bank cards - both credit cards and cash cards - from January 1. The first eight months of this year saw 6,362 bank card fraud cases, local media reported, which is double that of the same period the previous year. The amount involved was 440 million yuan, a rise of 138 per cent.

As in the rest of the world, the most common forms of bank card fraud are using fake identities to withdraw cash, and stealing and peddling credit card information. China remains a very cash-focused society. While banking has opened up considerably in recent years, many major transactions are still carried out in cash, and one is often forced to carry around large quantities of 100-yuan notes. There are powerful cultural issues behind China's resistance to the credit card. Even in Hong Kong, the debit card is the preferred form of payment for many people. China's savings rate is one of the highest in the world, at about 39.7 per cent of household disposable income last year.

This compares with a savings rate of about 3 per cent in the US, and rates of credit card default in the US are significantly higher. China's innate prudence may yet rescue it from a new debt spiral. @Email:[e-mail]