April 6 (Bloomberg) -- Catherine Xia racks up about 8,000 yuan ($996) a month, almost 90 percent of her salary as an account manager at a Shanghai trading company, on her China Merchants Bank Co. credit cards. Yet she never rolls over payments.
``I use credit cards for convenience, not to mire myself in debt,'' says Xia, 28. ``My family tradition is that you save first, then you spend. My parents already frown upon my huge credit-card bills, so I won't push the limit too far.''
China Merchants, HSBC Holdings Plc and Citigroup Inc. must get more Chinese into the borrowing habit to make money in the nation's nascent credit-card market, says Ron Logan, who heads the credit-card unit of HSBC's venture with Shanghai-based Bank of Communications Ltd., China's No. 5 lender.
``While profit may not be immediately possible, this is something that will develop over the next few years,'' says Logan, 49. ``Crucial to achieving this is ensuring that the percentage of active cards grows along with revolving balances.''
The number of cards issued in China jumped 13-fold to 40 million in the past two years as incomes increased in the world's fastest-growing major economy. Only 2 percent of cardholders frequently roll over their bills, says Yi Wang, a partner at McKinsey & Co. in Shanghai. In the U.S., the rate is 56 percent, according to 2004 figures from the U.S. Federal Reserve.
``No one is using the credit line to borrow, so there is little interest income,'' Wang says. ``It's not that people don't use the cards, but to make money in this business is extremely difficult. I'm not sure anybody is.''
Mao's Legacy
China's recent history has reinforced a frugal mentality that dates back 25 centuries to the philosopher Confucius, who said: ``He who will not economize will have to agonize.''
Communist leader Mao Zedong outlawed private wealth after the revolution of 1949. During his Great Leap Forward, a failed push to turn the nation into an industrial powerhouse that began in 1958, food shortages caused millions to starve.
Today, Chinese consumers are reluctant to spend as the state scales back welfare programs, shifting education, health- care and retirement costs to individuals.
China's household savings represented 16 percent of the nation's gross domestic product at the end of 2004, compared with a minus 3.5 percent ratio in the U.S., where consumers spend more than they earn, according to International Monetary Fund statistics.
The revenue banks receive from credit cards issued in China will rise to more than $5 billion by 2010, from $500 million last year, according to a report by New York-based McKinsey. Wang expects ``major profitability'' within a decade as cardholders become accustomed to rolling over their bills. He didn't give detailed projections.
Credit Promotions
London-based HSBC -- Europe's biggest bank by market value -- and Bank of Communications are using special promotions to ease customers into the practice of borrowing.
The venture lets holders of its MasterCard cards make interest-free installment payments on purchases of 1,500 yuan or more. Customers pay a monthly service charge of 0.68 percent to 0.72 percent of the purchase price. The government-set interest rate of 0.05 percent a day, or 18.25 percent a year, kicks in when they miss installment payments.
Cardholders who earn at least 50,000 yuan a year can get a credit limit as high as 50,000 yuan and may defer payment interest-free for as long as 56 days, according to the card venture's brochure.
HSBC, which owns 20 percent of Bank of Communications, and its Chinese partner have issued 750,000 credit cards since they began offering them in July, according to the Chinese bank. They aim to raise that to 1 million by July 2006 -- a fraction of the 104 million credit cards HSBC had issued worldwide as of last year. HSBC doesn't disclose its credit-card earnings for China.
`Very Conservative'
``China is obviously a big market, but it will take a long time,'' says Bryan Yip, who helps manage $3 billion of stocks at Standard Life Investments Ltd. in Hong Kong. ``Borrowing habits are still very conservative.'' Standard Life owns shares of HSBC and Citigroup, according to Bloomberg data.
New York-based Citigroup, the world's biggest financial- services company, and partner Shanghai Pudong Development Bank Co. began offering co-branded credit cards in Shanghai in February 2004 and have since expanded to 10 cities. The venture had issued 300,000 cards as of November, Pudong Bank Vice President Shen Si said at the time.
Pudong Bank, China's No. 2 publicly traded lender, expects its credit-card unit to break even after issuing 1 million cards, assuming 70 percent of holders use the cards daily. Citigroup and Pudong Bank don't disclose credit-card earnings.
`Prudent' Approach
``Credit cards are the world's most popular retail payment tool and, given time, we believe this will also be the case in China,'' says Lee Ah Boon, manager of Citigroup's Shanghai-based Chinese consumer unit. ``Given China is such a new market for credit cards, we're placing a strong emphasis on being prudent in our approach.''
The Citigroup venture lets customers pay in installments for consumer electronics purchases that exceed a customer's credit limit and cost 4,000 yuan or more, according to its Web site. Customers don't pay service charges or interest if they make monthly installment payments in full.
China Merchants Bank, the nation's largest publicly traded lender, had 5 million dual-currency credit cards in circulation at the end of 2005 and aims to issue 3 million more this year, says President Ma Weihua, who describes the bank as China's leading credit-card issuer. The bank doesn't disclose credit- card earnings.
``Relatively few people are using the credit line to borrow, and that's limiting our ability to issue more cards and make a profit,'' Ma says. ``While we want people to roll over and earn interest on unpaid balances, we don't want to see them default.''
South Korean Defaults
Encouraging credit card-debt has backfired elsewhere in Asia. LG Card Co., South Korea's biggest credit-card company, required a 4 trillion won ($4.1 billion) bailout from creditors after a consumer borrowing spree encouraged by tax breaks and lax credit screening soured in 2002, pushing up defaults.
New York-based American Express Co., the No. 4 U.S. credit- card company, stopped issuing new cards in Taiwan in February, citing concerns over increasing bad debt. It resumed issuing cards last month.
China may eventually face similar risks, says Andy Xie, chief Asia economist at New York-based Morgan Stanley. While older consumers aren't likely to build up credit-card debts because they've known poverty, the banks may succeed in promoting borrowing by younger people raised in a more consumer- oriented society, Xie says.
``Banks can achieve that by giving credit cards to those born in the '80s who want to spend but don't have the income,'' he says. ``But you know they will default.''
Consumer Focus
China's banks are relying more heavily on consumers as their traditional source of revenue -- lending to state-run companies in industries such as steelmaking and property -- shrink. The government in 2004 ordered banks to reduce lending to such industries to prevent the economy from overheating.
With China preparing to let banks set their own interest rates for the first time, margins on loans may be squeezed as lenders vie for customers. The People's Bank of China hasn't said when it plans to deregulate interest rates.
``The traditional business of Chinese banks has started to shrink,'' Jiang Jianqing, president of Industrial & Commercial Bank of China, the nation's biggest lender, said in a November speech. ``We need to find other sustainable sources of revenue.''
That may not be easy. Even Merchants Bank President Ma says he won't roll over his credit-card bills.
``I would never let the bank earn interest on my credit card,'' Ma says. |