Chinese learn credit card perils the hard way

BEIJING (Reuters) - Beijing retiree Yuan Yizhong cut up his son’s seven credit cards with a scissors in a frenzy of fury when he discovered that the 29-year-old had racked up huge debts that he couldn’t afford to pay back.

People chat next to advertisements for a local bank's credit card in the center of Shanghai August 10, 2009. REUTERS/Nir Elias

Yuan then used most of his life savings to repay his son’s credit card bills of 200,000 yuan ($29,280), 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 sadly.

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,” Nie said.

China’s banking watchdog, the China Banking Regulatory Commission (CBRC), told banks in July 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 2009, a jump of 133.1 percent from a year earlier.

Policymakers 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 four million South Koreans unable to pay their card debts earlier this decade.

Government-owned China UnionPay controls the credit card system as well as automatic teller machines (ATMs) across the country. It has partnered up with firms such as Visa and Mastercard Inc as well as local banks to issue credit cards.

In fact, the number of credit cards issued in China has nearly tripled to 142 million in 2008 compared to 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.

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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 in 2008. Credit cards accounted for almost 15 percent of retail sales of social consumer goods in 2008, sharply up from 4.8 percent in 2006.

Nevertheless, the total amount of credit card debt is still tiny compared to national household deposit of 25.7 trillion as of end June.

China’s savings rate is one of the highest in the world at around 39.7 percent of household disposable income due to a culture of frugality from decades of deprivation. By comparison, in the United States, 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 stabilize the Chinese economy and protect it from external downturns.

“Using credit card 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.

Around 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,” BOCOM’s Lu said.

Guo Tianyong, a professor at Beijing-based 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 2008. In the United States, it’s about 10 percent.

“A few years ago the ratio was only one percent, but this year it will undoubtedly rise as people’s incomes fall amid the global financial crisis,” Guo said.


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 specifically designed for college students.

The Industrial and Commercial Bank of China now only gives student credit cards to graduate students as well as undergraduates studying at renowned universities as they are more likely to get better jobs after graduation.

Chinese banks were eager to grab market share in a rapidly expanding market, and sometimes resorted to unethical practices.

Last year, students at a Xi’an university were astonished to discover they had been given credit cards by a major Chinese bank.

The university had filled in the application forms without the students’ consent or signatures to help the bank achieve its credit card quota, resulting in more than 10,000 credit cards being issued to unwitting students.

Before the recent crackdown, credit card peddlers could be seen everywhere from shopping malls to student dormitories as banks not only pressured their own staff to issue cards, but also outsourced the business to third parties.

Outsourcing companies sent sales representatives through office buildings, luring applicants with gifts and giving cards to anyone with an ID and a completed application form.

The third party issuers had no risk, the more cards they issued the more commission they received from banks, Guo said.

“College students are riskier than average, with a bad loan ratio of 4 percent. Most of them don’t make any money, increasing the possibility of sour debt,” Guo added.

Several banks have set up special collection teams for bad loans. They used to send reminder text messages or call the debtors, but now they go directly to customers’ home.

Recent efforts to curb credit card use are too late for Yuan and his son. Collection agents visited Yuan’s home 10 times in June to demand that he pay his son’s debts. They threatened to put his son in jail if the bills went unpaid.

“Isn’t this a trap by issuing credit cards to students?” Yuan asked. “Students do not have any income. It is their parents who must repay their bills at the end of the day ... It is immoral for banks to do this just to get bigger market shares.”

“I am from the old generation and I spend what I earn,” Yuan said. “I really have no idea about this way of consumption.”

($1=6.830 Yuan)

Reporting by Michael Wei; Editing by Megan Goldin