China Prods Its Consumers To Use Plastic

WALL STREET JOURNAL, December 4, 2003

China's government wants its billion-plus citizens to start using a new phrase: "Charge it."

In hopes of building a credit-card business in advance of the summer Olympics in Beijing in 2008, Chinese officials have told larger merchants in the capital city that at least half of them must accept credit or debit cards by the end of next year -- and no fewer than 90% by 2008. Shanghai has set similar goals for its big stores.

Consumers, meanwhile, are being enticed with monthly "lucky-draw" prizes, including a new car, whenever they use a card instead of cash.

At a time when much of the industrialized world is trying to come to grips with a serious consumer-debt problem, the world's largest nation hopes to persuade consumers to charge -- even though analysts say China's financial system could be vulnerable if consumer debt balloons.

Yuwa Hedrick-Wong, MasterCard International Inc.'s chief economist in Asia, says Chinese banks already are weighed down by bad loans and can't afford the extra burden. "A consumer-credit bubble would finish many of them," he says. "They have to get this right."

Certainly Beijing doesn't want to emulate the South Korean government's drive to increase credit-card usage. Four years ago, in an effort to break the Korean economy's dependence on exports, Seoul required most retailers to honor credit cards, so that now 87% of all shops are plastic-friendly. The South Korean government also offered consumers tax deductions for purchases made with credit cards.

The result was an explosion in credit-card purchases and an initial boon to the economy and the banks. But this easy credit eventually caused a spike in personal bankruptcies and bank write-offs of bad debt that has hurt the Korean economy this year.

So why the rush to charge in China?

In part, officials are bracing for an anticipated surge in foreign credit-card spending during the Olympics and the 2010 World Expo in Shanghai. Officials want to be sure a system is in place to handle it. The government also is eager to see Chinese banks grab their share of this lucrative business over the next two years before foreign banks are allowed to compete inside China in issuing credit cards for purchase in the local currency.

But Chinese store owners and consumers are wary. Only about one million Chinese have credit cards, 24 million have debit cards that offer limited borrowing, and only about 4% of the nation's merchants accept cards.

Even some of the shop owners who accept cards discourage their use. "I ask people to pay in cash if they can so I can avoid the fees" that banks charge stores on card purchases, says Li Xiao Qian, manager of 30 degrees C, a trendy clothing boutique in Shanghai.

In hopes of wooing people like Ms. Qian, Beijing has said it will bestow awards on retailers that rack up a high number of credit-card sales. The government also has told banks to give certain retailers an introductory one-month period free of fees.

Yet a number of technical hurdles remain. Credit cards issued by banks in southern China, for instance, don't always work in the north, a situation the government is trying to address. China is accelerating plans to implement a common technical standard to read cards, but much work remains. Outside of major metropolitan areas, card acceptance is low.

Fan Hong, manager of the upscale Hua An Hairdressing Salon in Shanghai, says the technical snafus mean that out-of-town customers who spend hundreds of dollars on hair and skin treatments and products sometimes find their cards are rejected. "That causes problems," she says.

Just as formidable are long-held consumer attitudes. China's central bank says that card spending accounted for only 2.7% of overall consumer spending in 2001, and only about 5% of Chinese cardholders carry a balance. That compares with 75% of U.S. cardholders who carry a balance at least once a year, according to the Nilson Report, a payment-card industry newsletter based in Oxnard, Calif.

Sheila Ji, a 25-year-old salesperson, was shopping for a leather jacket in a Shanghai department store recently. She has a credit card but says she planned to use cash if she decided to buy something. Why? She doesn't want to worry about paying the bill later.

Ye Rong, a news anchor on Shanghai television, uses her card more regularly, on bigger purchases like clothes as well as for some daily needs, such as food. But she stops short of carrying a balance. "I use it for convenience," she says. "But I prefer not to borrow money."

Some younger Chinese, though, seem more willing to take on debt. Mao Jia Yi, a college student in Shanghai, says she would need a guarantee from her parents to qualify for a card with overdraft protection, a form of limited credit. Yet she can hardly wait. "Then when I want to buy something, I can just buy it," she says.

Some retailers smell opportunity. Shops near the historic Bund district that cater to overseas tourists are among those that are becoming more plastic-friendly. "They help increase sales, especially to foreign buyers," says Wang Youzhen, a cashier at Shanghai Book City. The store, the city's largest bookseller, has been accepting cards for five years, though Ms. Wang estimates that only about 10% or so of its customers charge their purchases.

But even in this relatively wealthy city, most merchants resist spending money to install a credit-card system and paying the bank fees. "The merchant owner is used to dealing with cash," says Albert Shiung, Visa International's China country manager. "It takes some persistence from the banks to convince them to take an additional payment vehicle. This kind of effort will take time."

Success also could depend on prodding Chinese banks to issue cards. So far, they have been slow to embrace credit, but looming competition may provide the spark. Beginning in 2007, foreign banks will be allowed to offer cards in which bills are calculated in the Chinese currency. Already, Citigroup Inc. has taken a 5% stake in China's Shanghai Pudong Development Bank and, subject to regulatory approval, can increase its stake to 24.9%.

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