Rising debt forces China's banks to scale back on credit card issuance
August 16, 2009
Yuan then used most of his life savings on repaying his son's credit card bills of 200 000 yuan (R238 000), managing to pay off about half.
"My son will get my house after I die, but I'm afraid it might not be enough," Yuan said.
Stories like Yuan's have forced China's government and banks to scale back a credit card policy that expanded too far too fast in a country with little history or experience with personal debt.
Credit cards gained popularity among Chinese as the middle class expanded and living standards rose, and as the government tried to encourage the use of such cards to stimulate domestic consumption.
But rising debt, especially among young Chinese who were poor candidates for credit cards in the first place, has put a strain on some families and the government is now tightening up the credit card industry.
"In the past two years, banks have blindly issued credit cards," said Nie Junfeng, an expert on personal debt at Citic Bank, the country's seventh-largest lender.
"The bubble has started to form and the risks rooted in false application information and low-income customers are beginning to emerge," said Nie.
China's banking watchdog, the China Banking Regulatory Commission, told banks last month not to offer gifts to new credit card holders, set quotas for their sales staff, and perhaps most importantly, not to issue cards to people under 18.
The regulator's admonition followed the disclosure by the People's Bank of China that 4.97 billion yuan of credit card payments were at least 60 days late in the first six months of this year, a jump of 133.1 percent from a year earlier.
Policy makers are keen to ensure that if plastic does take off in China there is no repeat of the sort of uncontrolled issuance that left as many as 4 million South Koreans unable to pay their card debts earlier this decade.
Government-owned China UnionPay controls the credit card system as well as ATMs across the country. It has partnered with firms such as Visa and Mastercard as well as local banks to issue credit cards.
In fact, the number of credit cards issued in China nearly tripled to 142 million last year compared with 2006, with total transaction volume hitting 3.5 trillion yuan, the country's central bank said in a report in April.
About 1.9 billion credit cards are believed to have been issued in China since 1985. Cash is still king in China, but plastic is becoming popular. Locals joke that there are more ATM machines than public toilets. Nearly all shops and restaurants in major Chinese cities accept credit cards.
Roughly one third of credit card payments, or 1.1 trillion yuan, were generated from consumption spending last year.
Credit cards accounted for almost 15 percent of retail sales of social consumer goods last year, sharply up from 4.8 percent in 2006.
Nevertheless, the total amount of credit card debt is still tiny compared with national household deposits of 25.7 trillion as at the end of June. China's savings rate is one of the highest in the world at about 39.7 percent of household disposable income due to a culture of frugality from decades of deprivation. By comparison, in the US, just 3.2 percent of household disposable income is saved, according to research by the Massachusetts-based National Bureau of Economic Research.
Credit cards may help people feel comfortable spending more, assisting Beijing in its efforts to increase domestic consumption to stabilise the Chinese economy and protect it from external downturns.
"Using credit cards will certainly help boost consumption, because at least some people would not perceive credit card purchases as affecting their bank balance," said Joe Lu, an analyst at Bocom International in Beijing.
Young people, including students, who can ill afford to acquire huge debts are more likely to embrace credit cards. But as with Yuan, the result is sometimes devastating in a country where the law does not allow for credit card debts to be expunged by declaring bankruptcy.
Unlike their Western counterparts, most Chinese parents believe it's their obligation to pay their children's debt if they are unable to do so. About 11 percent of Chinese parents paid credit card debts for their children aged between 22 and 27, a group that has become accustomed to the good life but has found it difficult to pay for it, according to a survey by Beijing Youth Daily newspaper.
"With credit cards, young people will quickly empty their parents' pockets," said Bocom's Lu.
Guo Tianyong, a professor at Beijing's Central University of Finance and Economics, predicted China's credit card bad loan ratio would rise to 3 percent this year, from 2.4 percent at the end of last year. In the US, it is about 10 percent.
"A few years ago the ratio was only 1 percent, but this year it will undoubtedly rise as people's incomes fall amid the global financial crisis," said Guo.
Banks have started to take action. Citic Bank suspended the college student card in February. Soon after, China Merchants Bank halted its Young Card, a credit card designed for college students. - Reuters
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