SAVINGS AND CREDIT CARDS IN CHINA

CASH AND HIDDEN WEALTH IN CHINA

Although card use is increasing in China’s large coastal cities, cash is still dominant in the interior. Economists and others also argue that using cash contributes to corruption and the “gray economy,” for example, by helping merchants avoid taxes. And businesses dealing with large amounts of cash have extra costs for things such as security and office safes. [Source: Keith B. Richburg, Washington Post, July 29 2011]

An August 2010 study by the Credit Suisse Group revealed that China’s households hide as much as $1.4 trillion of income not reported in official figures. The figure is huge---equal to 30 percent of GPD. The report also said 90 percent by the nations richest people hide much of their wealth. Much of the income may be “illegal or quasi-illegal” the study said.

William Pesek of Bloomberg wrote: “It should no surprise that a nation growing 10 percent has a healthy gray economy running in parallel, That’s what happened when an all-powerful top-down government mixes with vast supplies of capital.”

“There may be both good and bad news in the above study...The good: it lends credence to the domestic-demand story for Chinese growth. It turns out the average urban disposable household income is 90 percent more than official figures. The bad: China’s rich-poor gap may be much bigger than we realize and this could lead to social unrest.

Neighborhood Banks and ATMs in China

One survey found the average waiting time in a state-run bank is 41 minutes and that 80 percent of people in Guangdong surveyed said they prefer a foreign bank over a domestic one.

A new customer service law went into affect in early 2007 that made it illegal for sales clerks to be rude to customers.

The Chinese have traditionally shied away from credit and loans There is saying that goes: “Chinese people don’t like to eat next year’s food this year.” But this attitude is changing among young people who are more likely to spend money

The first ATM was installed in China in Guangdong. They did not become widespread until around 2000. As of 2008, there were around 120,000 ATM machines in China, compared to about 480,000 in the United States.

ATMs sometimes spit out counterfeit money and test paper and customers have little means of getting their money back.

ATMs, See Crime

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Shenzhen Book City

Savings in China

China has the world's highest savings rates: between 38 and 42 percent, despite low incomes, compared to 5 percent in the United States. The Chinese have $1.7 trillion in household savings, or almost 70 percent of gross national product. Total savings in 2005 was equal to roughly half of GDP, compared to 30 percent in Japan and 14percent in the United States. Urban dwellers account for 70 percent of bank savings.

The Chinese have traditionally been savers who didn’t seek credit to buy consumer goods. Instead they saved first and then bought something. The Chinese have traditionally emphasized being frugal. One Confucian saying goes: “He who will not economize will have to agonize.” Many Chinese don’t even like to put their savings. Newspaper often run stories about people who have their savings eaten by rats.

In the Mao era it was common for people to save everything whether they needed it or not because people had so few things and one never knew when they or a friend might need it. Among the things that people refused to throw away were old clothes, tools, thermos and even plastic bags and cans.

Chinese are conditioned to save for things like medical expenses, education for their children and old age. In many cases they don’t dare to do otherwise.The dismantling of the iron bowl since the end of the Mao era has taken away the welfare safety net. One forth of the population has no health insurance and public pensions cover less than one third of workers. For this reason stimulating a consumer-based culture and economy in China is difficult and analysts say will remain difficult until a decent social safety net is established. One effect of the one child policy is that old people have to rely on themselves not their children to take care of them.

The rate of return is low on household financial assets and there are of limited portfolio opportunities because there are few alternatives to depositing money in state-owned banks. It is also difficult for ordinary people to get loans. This means that Chinese have to save money to purchase big ticket items like houses and cars rather than borrow against future income.

In 2007, the annual inflation rate of 4.6 percent exceeding the one-year bank account deposit rate of 3.87 percent. This deterred many people from putting their money in banks. Many instead invested in stocks of real estate.

The government is trying to encourage people to spend rather than save as a way of increasing economic growth. It has imposed on 20 percent tax on interest on savings accounts. Economists say that savings won’t really stop and consumption beginning until Chinese have more confidence about there future.

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Jinzhou

Spending in China

While older and poorer Chinese save to a third of their incomes, those who are younger and have money are spending it.

Consumer spending only accounts 35 percent of GDP, compared to more than two thirds in the United States. A study by the McKinsey consulting group found that the average Chinese workers needs to put in seven hours on the job to earn enough to purchase the same amount of goods or services that an American worker could buy with one hour’s pay.

A shopping spree by a typical Beijing housewife in the run up to the Lunar New Year might consist of buying a large sack of rice, a large bottle of cooking oil, a bag of beef jerky to give out as gifts, with the grandest purchase being a $40 washing basin purchased with gift coupons given to her husband by his employer as a bonus. A housewife who bought these things told the Los Angeles Times, “Chinese people like to buy practical gifts. So it’s mainly food and drinks. We’re not going to buy junk that lasts one or two years.”

Spending is not just limited to major urban areas. According to a survey by marketing researchers Ogilvy and Mather, two thirds of retail sale are outside the 24 largest cities. Mickey Chak, planning director at Ogilvy and Mather, told the Washington Post, “One of the characteristics of Chinese consumers is that they are very optimistic compared to their counterparts in Europe or the U.S. They feel that their spending power and standard of living is only going to get better and better. It is that optimism that makes them spend even during tough economic times.

Mohamed El-Erian, an analyst at the bond fund giant Pimco told the Washington Post, “The Chinese consumer now has the wallet of sustainability increase consumption spending. This is the will. And will is still being held back by a host of institutional cultural issues.”

In an effort to increase consumption and spending in the countryside China has built supermarkets and even malls in what would regarded as the boonies to get farmers and rural workers to spend their money and generate local economic activity.

Gold in China

China recently overtook the United States and the world’s second largest consumer of gold jewelry after India. A Chinese factory worker who bought a $439 gold pendant with his wife told AFP, “we just like gold. Gold is a better store of wealth than platinum. Of course, diamonds are lovely. But we can’t afford the big ones and are not interested in the small ones. On a per capita basis gold consumption is about a tenth that of the United States: The average Chinese buys 0.16 grams of gold, compared to 2.7 grams in Hong Kong and 1.42 grams in the United States.

In China, gold jewelry has traditionally been a sign of wealth. Chinese and other Asians have traditionally bought gold as a hedge again inflation, instability and war. Most gold is bought in the form of jewelry. Rural women and low income earners have traditionally bought gold earrings and bracelets because they could easily be sold for cash in the case of an emergency.

In the late 1990s and early 2000s gold became a popular investment among middle class Chinese when its value began to rise faster than the value of the dollar. To meet demand Chinese department stores sold gold bars stamped with New Year animals, banks offered “paper gold” and the Gold Trading Exchange was opened in Shanghai. Chinese began looking to gold more as an investment after thestock market tanked in 2007 and 2008 and interest rates were so low there was little incentive to keep money in the bank.

See Resources

Credit Cards, Debit Cards and Virtual Money in China

Chinese are not big credit card users. The first ones were introduced in 1986 but didn’t attract many users. As of 2004, only 1 percent of Chinese citizens possessed Western-style credit cards and 2 percent of merchants could handle them. Those that had them tended to be members of the relatively wealthy urban elite. In China there is a cultural aversion to going into debt and no central credit rating. The rules for getting credit cards in some places can be complicated

As of 2008, there were about 128 million credit cards in circulation up from 3 million in 2003. Some predict this figure will rise to 1 billion by 2020. The largest issuer of credit cards in China is China Construction Bank.

Number of credit cards per person: 0.05. Credit card debt per person: $5. Debt as a percentage of disposable income: 0.6 percent. Increase in the number of credit cards between 2002 and 2007: 282 percent. [2007, Sources: Euromonitor, Bloomberg, New York Times]

Only 40 percent of urban dwellers have credit cards and only 10 percent of rural residents have them. Many card holders seldom use them. Between 2004 and early 2007 the number of credit card users increased 17-fold to 50 million with 30 percent of the merchants in Shanghai able to handle them and businesses in Beijing gearing up for hordes of plastic-carrying foreigners during the 2008 Olympics. Credit card revenues in 2006 were round $500 million MasterCard estimates there will be more than 75 million credit card users by 2010 and that revenues at that time will reach $5 billion..

Among Chinese credit card users, more than 80 percent pay the entire balance every month. One survey found that only about 3 percent of bank customer failed to pay bills or defaulted on loans or credit cards. The loan-loss ratio for credit card users at one bank rose from 0.67 percent in 2005 to at least 1.5 percent in 2008. Most credit cards have a 18.25 percent annual interest rate set by the government.

In 2004, Citigroup, American Express, HSBC Holding and the Japanese credit card company JCB all signed credit card partnerships with Chinese banks with their eyes on China’s growing middle class. HSBC’s MasterCard lets customers make interest-free payments on purchases of 1,500 yuan or more, with customers paying a monthly surcharge of up to 0.72 percent of the purchase price. The Bank of China offers Great Wall platinum Visa credit cards, with a frequent flier rewards program.

Debit cards are becoming popular. As of 2004, of the 704 million bank cards in circulation 650 million of them were debit cards, used primarily to draw cash from ATM machines. Banks also offer dual currency cards allowing users to purchase item with yuan credit in China and in foreign currency credit outside China.

Q-coins are a popular virtual currency used to but goods and service in the Internet,. One Q-coin is equal in value to 1 yuan. The virtual currency has become so popular some it could challenge the yuan. The Q-coins can be bought with bank cards or telephone cards. The Q-coins were originally intended to buy things like online greeting cards, antivrus software or online games but are now used buy anything online and are traded themselves.

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Increased Usage of Credit Cards

The use of credit cards and debit cards is skyrocketing. China issued 230 million new credit cards in 2010, an increase of 24 percent over the previous year, according to the China Banking Association, and the use of plastic for retail sales is up more than 40 percent this year. [Source: Keith B. Richburg, Washington Post, July 29 2011]

“In the next 20 years, more and more people are going to switch from cash to credit cards,” Arthur Kroeber, managing director of GaveKal-Dragonomics, a Beijing-based economics research firm, told the Washington Post. “The growth is going to be spectacular.”

Although the number of cards in circulation in China is huge, experts said that is because many people, such as Jin Jitao, own more than one. In a country with no real history of personal credit ratings, the people who get cards are largely the people who already have them.

Chinese Credit Cards Users

Keith B. Richburg wrote in the Washington Post, “Jin Jitao, an editor at a textbook publishing house, may be the prototype of China’s new urban consumer. Although he had never even heard of credit cards until 2004, he now has 79.He has a card embossed with his nickname, one with a photo of his family, a pink Barbie card and two with Garfield the cat. He has a card especially for dads and several with Chinese cartoon characters. “I like beautiful cards,” he said.

With credit cards, Jin told the Washington Post he doesn’t have to worry about counterfeit bills---a large problem in China. Plus, he added, “it’s also clean. Cash has lots of bacteria.”

Most card users in China never carry a balance. “I always pay them off,” Jin told the Washington Post. “Why pay the extra interest?” And he mainly uses them to get discounts and special promotions, such as half-priced dinners and lower-cost movie tickets.

Problems with Credit Cards in China

Thus far banks have banks have failed to make much money on credit cards in part because the idea hasn’t really caught on and frugal users avoid overspending and paying the stiff late penalties, which have traditionally been the primary way that American lenders made money off credit card. Only around 2 percent of cardholders frequently roll over their bills, compared to 56 percent in the United States.

One relatively affluent executive in Shanghai told Bloomberg, “I use credit cards for convenience not to move myself in debt. My family tradition is that you save first, then you spend.” A financial analyst in Shanghai said, “No one is using the credit line to borrow, so there is little interest income. It’s not that people don’t use the cards, but to make money in this business is extremely difficult.”

The government has said it wants 30 percent of retail purchases to be made with credit and debit cards. One of the biggest obstacles in the credit card business has been overcoming the lack of national credit bureau. One was established in Shanghai. An effort s being made toe establish such a system nationwide.

Chinese banks don’t have national credit bureaus or sophisticated scoring systems that allow them to dispense approvals in a few minutes. Instead they rely on huge masses of workers that do much of the paperwork by hand. Another problem is the preference for cash. Union Pay, the main payment system, is expensive for retailers, who prefer to deal in cash anyway to avoid taxes.

Chinese banks can be quite heavy-handed on delinquent credit card users. In some cases if users miss two payments in a row, they are required to pay the full balance owed plus heavy penalties. If the users don’t pay up the bank takes out an advertisement, calling them deadbeats, or haul them into a bank office and get them to sign papers in which they promise to pay. There are laws on the books that can send a person for jail for up to five years got intentionally defaulting on a sum as little as $3,000.

China’s Credit Cards Monopoly

A single Chinese company,China UnionPay, has a de facto monopoly over the credit card market. Foreign credit card firms cannot issue local cards unless they are co-branded with the UnionPay logo, and all transactions must be processed on the UnionPay network. [Source: Keith B. Richburg, Washington Post, July 29 2011]

“Lots of people think it’s unfair that China UnionPay has a monopoly,” one China credit card user told the Washington Post. “If other credit card companies in China could issue their own cards, people would fight to apply for them.”

American Card Companies in China

The American card companies are present in China but they work in a forced marriage with China UnionPay. American Express, which has been in China since 2004, signed a new “memorandum of understanding” to “explore the expansion of our current cooperative activities,” said Luisa S. Megale, international public affairs vice president for the company. [Source: Keith B. Richburg, Washington Post, July 29 2011]

MasterCard and China UnionPay signed an agreement in Shanghai in June 2011 that allows UnionPay cards used outside China for e-commerce transactions to be processed over MasterCard’s worldwide network. Visa is in an ongoing dispute with UnionPay over who can process its co-branded cards outside China.

With UnionPay’s monopoly in China, the American companies cannot offer most of their well-known customer services, such as replacing stolen cards. The foreign companies can issue cards only in dollars, not in the local currency, which most Chinese would want. And UnionPay gets a cut of every transaction.

Credit Cards as a Trade Issue Between China and the United States

China UnionPay’s monopoly is about more than simply opening a potentially lucrative market to American credit card companies. The United States has asked China to shift from an export-led growth model to a more consumer-led economy. Chinese people buying more Chinese-made products would help reduce the U.S. trade deficit with China, and one way to spur domestic consumption, economists and business leaders say, is to put more credit cards into the hands of China’s newly rich consumers. [Source: Keith B. Richburg, Washington Post, July 29 2011]

“Go back to the 1960s, which is when credit cards took off in the United States,” Kroeber told the Washington Post “There is pretty good evidence that that helped increase the vitality of the consumer economy.”

The American card companies have found support for their fight from the Obama administration. In February, U.S. trade officials asked the World Trade Organization to set up a panel to resolve the dispute with China, and the panel members were named on July 4.

“We have argued that financial-sector reforms in China would probably have a bigger impact on bilateral trade issues than, say, the exchange rate,” John Frisbie, president of the U.S.-China Business Council, told the Washington Post. “We don’t think this would eliminate the U.S. bilateral trade deficit with China, but it could further boost U.S. exports and narrow the trade gap somewhat.”

Consumer Loans in China

Consumer, automobile, education and housing loans are a relatively new phenomena in China. Often when loans are given out banks give them out too easily without demanding collateral and borrowers, not experienced with the responsibility that loans entail, take out bigger loans than then can pay back

People take out car loans that eat up more than half their income. Some people have taken out loans to build huge houses, beyond what they can afford, or to enhance their wine collections or purchase speculative stocks in causing the people who took out the loans to either go broke or cheat the bank.

Credit checks are lax. One Chinese banking executive told the New York Times, “We really can’t say the credit system here is good. In fact there is no credit system.” Getting people to pay back their loans can also be a problem. In the early 2000s, nonpayment rates of 50 percent were not uncommon in the car loan business. There is also trouble in the mortgage sector after a Supreme Court banned foreclosing on homes that are primary residences and then allowed it only after alternative housing was offered.

See Loans, Automobiles.

Personal lending is has traditionally been done informally among friends, family members and business associates. An organized system of consumer did not begin until the late 1990s when banks were allowed to offer mortgage loans, which now make up around 10 percent of total loans (2006).

As of 2007, China still didn’t have a credit rating system and banking laws were still being written. Some people have been able to obtain loans with forged documents and use that money to speculate on the real estate and stock markets.

Remittances and Pawnshops in China

China, India and Mexico are the largest recipients of remittances, with migrants sending home more than $20 billion in each country every year. Fei ch’ien is an informal money transfer system used in to transfer money from the United States and Europe to relatives in China. In many cases a person in the United States or Europe give money to a representative of the transfer service there and they contact people in the home country who give the money to the relatives. It is alternative to Western Union and bank remittances.

In some places pawnshops act as lending institutions, dispensing quick cash with everything thing from jewelry to stocks and real estate being put up as collateral. Pawnshops help ordinary people who need to pay off debts quickly and small businesses that need supplies. Pawnshops were closed by the Communists in the 1950s and were not allowed to reopen until 1987. In some cases they can give out loans of $50,000 on the spot with a minimal amount of paper work if the right collateral---usually several car or an apartment---is offered.

Image Sources: 1) Cgstock http://www.cgstock.com/china ; 2) Nolls China website http://www.paulnoll.com/China/index.html ; 3) Cgstock; 4) Picasaweb ; Others Wiki Commons

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2008 Jeffrey Hays

Last updated November 2011

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