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Worthington, Steve --- "Credit cards in China" [2005] MonashBusRw 15; (2005) 1(2) Monash Business Review 10

Credit cards in China

Steve Worthington

China’s huge financial services market is being eyed hungrily by foreign banks. But cultural attitudes towards saving and spending plus a poor national banking network create major obstacles for these financial service providers. Examining credit card use is just one way of demonstrating those challenges, writes Steve Worthington.

When China joined the World Trade Organisation (WTO) in November 2001, an era of consumer choice was expected to begin, heralding the entry of non-Chinese organisations into the market for financial services. Under WTO rules, all restrictions should be lifted by 2007 but, in reality, administrative and legal problems make it difficult for foreign financial services companies to compete in China. Historical, cultural and structural differences make the Chinese financial services market unique, especially in relation to the use of credit cards.

China’s financial system, including bank lending, is still largely controlled by the government, which owns most of the country’s financial institutions and banks, most notably the People’s Bank of China (PBOC), the central bank and the ‘big four’ specialist commercial banks: the People’s Construction Bank, the Agricultural Bank of China, the Industrial and Commercial Bank of China and the Bank of China. These four banks have been described by Kynge (2002) as insolvent, corrupt and hampered by socialist management systems. Unless China’s banking system is reformed urgently there will be a sharp drop in foreign direct investment.

These concerns haven’t stopped non-Chinese financial institutions seeking joint ventures and alliances in order to enter the Chinese market. In late 2001, the Hong Kong and Shanghai Banking Corporation (HSBC) took an 8 per cent stake in the Bank of Shanghai and in March 2002 Citibank was given approval by the PBOC to become the first international bank to undertake foreign currency dealings with Chinese citizens. However, foreign banks are still forbidden to offer services in the local currency (Renminbi or RMB) to Chinese citizens, because banking is regarded as a weak economic sector that needs to be protected from foreign competitors. Another regulation prevented foreign banks from opening more than one new branch each year, severely restricting their ability to penetrate the Chinese market by using a branch centric strategy.

One way of circumventing this barrier is to enter the Chinese market by using a payment card strategy, particularly through credit cards which are not dependent on a branch network. In theory, these payment cards can be based on ‘stand-alone’ relationships and offer a perfect opportunity to gather data on customers through the application process and subsequent usage and repayment behaviour, plus the opportunity to regularly communicate with these customers through the monthly statement, with all the attendant cross-sell opportunities this offers. The reality is more complex, partly because of the unique local conditions and infrastructure in China, but particularly because of the challenging differences between the way that relationships in financial services are perceived in western societies and the Chinese view of relationship, often described as Guanxi.

Guanxi can be defined as ‘personal relationships’ or ‘connections’ with other people, created through pre-existing relationships, say people from the same birth place, relatives, superiors or subordinates in the workplace. In China, everyone has Guanxi with a certain number of people and once they belong to this social network, they see each other as an insider. The distinction between insider and outsider is very important, because insiders are seen as trustworthy and reliable and they can approach each other for favours, resources and further contacts. Thus if an outsider wants to establish Guanxi with another network, the most effective way is to get a third party intermediary involved to construct a mixed relationship.

Despite centrally controlled and uniform interest rates and a fragmented Automatic Teller Machines (ATMs) system for deposits, savings in China increased by a large margin in 2002 and totalled 18,338.8 billion RMB, up 18.1 per cent on 2001, according to the National Bureau of Statistics of China (2003). This trend can be attributed to both cultural and technological reasons. First, saving is very much a part of the Chinese culture. Second, there has also been a huge growth in the number of plastic payment (bankcard) cards in China (as our table shows) driven mainly by the growth of debit rather than credit cards.

This culture of saving is in direct contrast to the borrowing culture, which in China is seen as a sign that a person is incapable of making ends meet. The Chinese ideology is to spend according to your income and people tend to pay in full, in cash, even for big ticket items such as cars and houses. Consumers prefer to borrow through informal channels such as family members, relatives and friends, often at very low or even no interest rate. This partly explains the very low penetration of revolving credit cards in China. Of the 277 million bankcards on issue in China in 2000, only 130,000 were true credit cards. The Economist magazine (21 January 2003) confirms China “remains a largely cash-centric society”, with payment cards only used for 2.7 per cent of retail purchases in 2001. This compares with more than 30 per cent in countries with mature payment systems. The Economist concludes: “The obvious need is to build a national network of ATM and Point of Sales (POS) terminals to accept all major cards.”

Spend, spend, spend

China’s nascent credit card market is forecast to grow rapidly according to industry sources (Cards International 2002). Visa International anticipates that it will grow between 75 to 100 per cent over the next three years, spurred by spending ahead of the 2008 Olympics and by the threat of foreign competition in 2007 under the WTO rules. There is also increased demand from Chinese citizens travelling abroad – in 2002 they numbered 12 million and spent around US$12 billion. As part of China’s commitments to the WTO, foreign institutions were permitted to issue international foreign currency credit cards directly to Chinese customers in 2004 and will compete on a level playing field with local credit card issuers in 2007. In anticipation of this, Citibank, the largest credit card issuer in the US, has entered the Chinese credit card market, with a deal to invest in the Shanghai Pudong Development Bank (SPDB). Citibank has already secured a 5 per cent share in SPDB and aims to control almost a quarter (24.9 per cent) of the bank by April 2008. SPDB is the ninth largest commercial bank in China and Citibank is its first foreign stakeholder.

The two banks have also won approval from the People’s Bank of China to set up a joint credit card centre based in Shanghai, which is widely expected to evolve into a joint credit card company. Under this scenario, Citibank’s expertise in risk management, credit scoring, collection of bad debt and marketing of credit cards would be matched with SPDB’s knowledge of the Chinese market, its existing customer base and its access to funding. The deal establishes Citibank as the first foreign investor to potentially own more than 10 per cent of a mainland lending bank and will give Citibank “a significant head start over its foreign rivals, under the WTO regulations” (Cards International 2003).

Given the complexities of the Chinese financial services market and the issues associated with the transition of economies from centralised state planning to private enterprise, the Citibank approach, as described above, may well be the most appropriate model for a foreign institution to enter the Chinese market.

The rapid increase in the number of POS terminals and ATM’s in China during 1995-2000 has been one of the factors that has contributed to the increase in the number of bankcards – this includes debit and credit cards. However the interbanking network is poor – a card from one bank cannot often be used in a POS or ATM operated by another bank. In some cases, cards issued by one bank in say Beijing, cannot even be used in the same bank’s machines in, say Shanghai.

In order to resolve this problem, the government-established China UnionPay (CUP) has developed a marque, the ‘Yin Lian’, to increase penetration of payment cards in China and to help Chinese card issuers resist the adoption of marques such as of MasterCard and Visa. The major task of the CUP, officially incorporated in Shanghai on 26 March 2002, is to enable all Chinese cardholders to use their card at any ATM or POS terminal in China. The organisation also aims to establish ‘card centres’, where expertise can be centralised and the credit card product can be better controlled and marketed. China’s domestic banks can now see the credit card’s potential profit and are consequently restructuring their operations and establishing ‘centres of excellence’, particularly in the city of Shanghai, which is promoting itself as a financial services centre.


Fantastic plastic statistics in China

A country of paradoxes

China is a country of paradoxes. It is pursuing a market economy and is awash with foreign money, yet 75 per cent of investment still comes from state-run enterprise. Urban household incomes are growing at well over 10 per cent a year, however household spending is subdued as people save rather than spend; the household savings rate is almost 40 per cent, compared with minus 1 per cent in Australia. Chinese attitudes towards funding consumption have remained very traditional. For example, according to The Financial Times (5 October 2003), although car ownership is growing, only 20 per cent of automobile sales are purchased with a car loan compared with 70 per cent in more mature markets.

So how do Chinese consumers finance their purchases? They approach family members and friends as well as their Guanxi personal relationships. This explains the underdeveloped tradition of credit in China, with banks seen as mainly a place for savings, and means there is little personal credit information. This will hinder the development of credit cards as a retail banking product. Without this credit reference information, credit card issuers will find it difficult to evaluate an application for a line of credit and to determine what level of credit to offer.

Organisations seeking to successfully enter the Chinese market need to better understand China’s various cultures. The 1.3 billion strong Chinese market is not homogeneous; there are stark differences between urban and rural consumers and wide disparities between the various regions and cities. Market research suggests consumers from various regions are significantly different from one another in terms of purchasing power, attitudes, lifestyles, media use and consumption patterns. One study recommends that “the most sensible approach is to see the Chinese market as a number of distinct opportunities, rather than as a whole market” and to accept that investing in China is a long-term process, not a way to quick profits.

Cite this article as

Worthington, Steve. 'Credit cards in China'. Monash Business Review. 2005.; Monash University ePress: Victoria, Australia. http://www.epress.monash.edu.au/. : 10–13. DOI:10.2104/mbr05015

About the author

Steve Worthington

Steve Worthington, Professor of Marketing at Monash University’s Faculty of Business and Economics, has written a report on the Chinese Cards Market entitled ‘The China Cards Market 2005/2006’, which was published in October 2005 by VRL Publishing Ltd. For more information email reports@vrlpublishing.com or Steve.Worthington@buseco.monash.edu.au


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